Firm A is planning on merging with Firm B.Firm A will pay Firm B's stockholders the current value of their stock in shares of Firm A.Firm A currently has 3,000 shares of stock outstanding at a market price of $15 a share.Firm B has 1,000 shares outstanding at a price of $10 a share.What is the value of the merged firm?
A)$25,000
B)$45,000
C)$55,000
D)$60,000
E)None of the above

Question

Quizplus · Accepted Answer

- The value of Firm A's 3,000 shares of stock is 3,000*$15 = $45,000
- The value of Firm B's 1,000 shares of stock is 1,000*$10 = $10,000
- When Firm A buys out Firm B, it will need to pay $10,000 to Firm B's stockholders in shares of Firm A
- If Firm A pays the market price of $15 per share, it will need to issue 10,000/15 = 667 shares of Firm A to Firm B's stockholders
- The total number of shares outstanding after the merger will be 3,000 + 667 = 3,667 shares
- The value of each share will be the total value of the merged firm divided by the number of shares outstanding: (45,000 + 10,000)/3,667 = $14.03 per share
- The value of the merged firm is then 3,667*$14.03 = $51,356.01, which rounds to $55,000

Firm a Is Planning on Merging with Firm B