Firm V was worth $500 and Firm A had a market value of $400.Firm V acquired Firm A for $450 because they thought the combination of the new Firm VA was worth $1,000.What is the NPV from the merger of Firm V and Firm A?

Question

Quizplus · Accepted Answer

The NPV of the merger can be calculated by finding the present value of the future cash flows generated by the new firm VA, and subtracting the initial cost of the merger. The initial cost is $450, which is more than the combined market value of the two firms ($500 + $400 = $900). Therefore, there is a negative NPV unless the future cash flows generated by the new firm are high enough to compensate for the high initial cost. Assuming the new firm is worth $1,000, we can calculate the NPV as follows:
NPV = Present value of future cash flows - Initial cost
NPV = $1,000 - $450
NPV = $550
Since the NPV is positive, the merger would be worth pursuing. Therefore, the best choice is B) $50, which represents the positive NPV.

Firm V Was Worth $500 and Firm a Had a Market