Firm V was worth $450 and Firm A had a market value of $375.Firm V acquired Firm A for $425 because they thought the combination of the new Firm VA was worth $925.What is the NPV from the merger of Firm V and Firm A?

Question

Quizplus · Accepted Answer

The initial values are:
Firm V = $450
Firm A = $375

The value after the merger is: 
Firm VA = $925

The cost of acquisition was $425. Therefore, the net value added is:
$925 - $425 = $500

However, we need to take into account the value of the two firms before the merger. The combined initial value was:
$450 + $375 = $825

Therefore, the NPV from the merger is:
$500 - $825 = -$325

This means that the merger actually reduced the value of the firms. Therefore, the best answer is B) $50, which represents the difference between the cost of acquisition and the initial value of Firm A.

Firm V Was Worth $450 and Firm a Had a Market