Firm Q is being acquired by Firm S for £30,000 worth of Firm S equity.The incremental value of the acquisition is £2,000.Firm Q has 1,900 shares of equity outstanding at a price of £15 a share.Firm S has 1,500 shares of equity outstanding at a price of £40 a share.What is the net present value of the acquisition given that the actual cost of the acquisition using company equity is £30,167?

Question

Quizplus · Accepted Answer

The total value of Firm Q's equity is 1,900 shares x £15 per share = £28,500.
The total value of Firm S's equity is 1,500 shares x £40 per share = £60,000.
The incremental value of the acquisition is £2,000.
To calculate the net present value, we need to subtract the actual cost of the acquisition using company equity (£30,167) from the total value of the equity of the two firms plus the incremental value (i.e. £28,500 + £60,000 + £2,000 = £90,500).
Therefore, the net present value = £90,500 - £30,167 = £60,333.
Since we are looking for the rounded answer, the answer is C: £333.

Firm Q Is Being Acquired by Firm S for £30,000