Principal is acquiring Secondary Companies for $38,000 in cash.Principal has 4,500 shares of stock outstanding at a market price of $31 a share.Secondary has 1,600 shares of stock outstanding at a market price of $22 a share.Neither firm has any debt.The net present value of the acquisition is $2,400.What is the price per share of Principal after the acquisition?

Question

Quizplus · Accepted Answer

The total value of Principal before the acquisition is 4,500 shares * $31/share = $139,500. The total value of Secondary is 1,600 shares * $22/share = $35,200. The acquisition cost is $38,000, so the net cost is $38,000 - $2,400 (NPV) = $35,600. The combined value after the acquisition is $139,500 (Principal) + $35,200 (Secondary) - $35,600 (net cost) = $139,100. The new total number of shares is 4,500 (Principal) + 1,600 (Secondary) = 6,100 shares. Therefore, the price per share after the acquisition is $139,100 / 6,100 shares = $22.80. However, this calculation seems to have an error in interpreting the net present value's impact. Let's correct the approach:The correct approach is to add the net present value (NPV) of the acquisition to the total value of Principal. The total value of Principal before the acquisition is 4,500 shares * $31/share = $139,500. The NPV of the acquisition is $2,400, so the total value after the acquisition is $139,500 + $2,400 = $141,900. The total number of shares remains the same since the acquisition is paid in cash, so it's still 4,500 shares. Therefore, the correct price per share after the acquisition is $141,900 / 4,500 shares = $31.53.

Principal Is Acquiring Secondary Companies for $38,000 in Cash