Firm A has a market value of $6,000 with 150 shares outstanding and a price per share of $40.Firm B has a market value of $800 with 40 shares outstanding and a price per share of $20.Firm A is acquiring Firm B by exchanging 25 of its shares for all 40 of Firm B's shares.Assume the merger creates $500 of synergy.What will be the value of Firm B's shareholders' stake in the merged firm?

Question

Quizplus · Accepted Answer

First, we need to find the value of Firm A after the merger. Firm A will have 150+25=175 shares outstanding. So, the new market value of Firm A will be:
175 shares * $40 per share = $7,000

The total value of the merged firm will be:
$7,000 + $800 + $500 = $8,300

To find the value of Firm B's shareholders' stake in the merged firm, we need to find the percentage of ownership Firm B had in the merged firm. Before the merger, Firm B had a market value of $800, which was 800/6,800 = 11.76% of the total market value of the two firms. Since Firm B is exchanging its shares for shares in Firm A, its ownership percentage will remain the same after the merger.

So, the value of Firm B's shareholders' stake in the merged firm will be:
11.76% * $8,300 = $974.29.

However, since Firm A is giving 25 shares to Firm B's shareholders, we need to add the value of these shares to get the final answer:
25 shares * $40 per share = $1,000.

So, the value of Firm B's shareholders' stake in the merged firm will be:
$974.29 + $1,000 = $1,974.29, or approximately $1,042.86 per share. Therefore, the correct answer is D.

Firm a Has a Market Value of $6,000 with 150