Firms A and B,both all-equity financed,are merging.Prior to merge,Firm A,having 100 shares outstanding,is worth $15,000,while Firm B has 50 shares outstanding worth $10,000.The combined firm will be worth $30,000.Firm A pays $11,500 in cash for Firm B.What is the net benefit of the merger to Firm A?
A)$3,500
B)$5,000
C)$11,500
D)$18,500

Question

Quizplus · Accepted Answer

Before the merge,
Firm A value per share = $15,000/100 shares = $150 per share
Firm B value per share = $10,000/50 shares = $200 per share

The merged firm will have 150 shares outstanding (100 from Firm A and 50 from Firm B) and a value of $30,000, making the value per share $200.

Firm A paid $11,500 in cash for Firm B, which means Firm B is valued at $11,500.

Firm A's post-merge value will be $15,000 + $11,500 = $26,500.

Firm A's net benefit is the difference between its pre-merge and post-merge value minus the cash paid for Firm B:
$26,500 - $15,000 - $10,000 = $1,500

Therefore, the net benefit of the merger to Firm A is $3,500 (the cash paid for Firm B plus the net benefit: $11,500 + $1,500). Answer choice A is the correct answer.

Firms a and B,both All-Equity Financed,are Merging