Firm A is acquiring Firm B for £40,000 in cash.Firm A has 2,500 shares of equity outstanding at a market value of £18 a share.Firm B has 1,500 shares of equity outstanding at a market price of £25 a share.Neither firm has any debt.The net present value of the acquisition is £2,500.What is the value of Firm A after the acquisition?

Question

Quizplus · Accepted Answer

The total cost of the acquisition is £40,000, which Firm A will be paying in cash. This means that the value of Firm A after the acquisition will be the sum of its original equity value and the value of the cash used to acquire Firm B.

The value of Firm A's original equity is 2,500 shares * £18 per share = £45,000.

The cash used for the acquisition is £40,000, and we know the net present value of the acquisition is £2,500. Therefore, the total value of Firm B is £40,000 + £2,500 = £42,500.

Firm B has 1,500 shares outstanding at a market value of £25 per share, which means the total equity value of Firm B is 1,500 shares * £25 per share = £37,500.

After the acquisition, the total equity value of the combined firm will be £45,000 (Firm A) + £37,500 (Firm B) = £82,500.

Finally, we need to divide the total equity value of the combined firm by the total number of shares outstanding to find the value of Firm A's shares after the acquisition. There are 2,500 shares outstanding from Firm A and 1,500 from Firm B, for a total of 4,000 shares outstanding.

Therefore, the value of Firm A's shares after the acquisition will be £82,500 / 4,000 shares = £20.625 per share.

So the value of Firm A after the acquisition is £20.625 per share * 2,500 shares = £51,562.50, which is closest to D) £47,500.

Firm a Is Acquiring Firm B for £40,000 in Cash