Firm A is considering a merger/acquisition with Firm B. Based on the following d
ID: 2736468 • Letter: F
Question
Firm A is considering a merger/acquisition with Firm B. Based on the following data, what is the stock exchange ratio if Firm A negotiates a merger with Firm B and if all the synergy gain goes to Firm A's shareholders?
Firm A:
Market value of debt: $4 million
Market value of equity: $6 million
Number of shares: 0.5 million
Estimated total firm value based on value-based management model: 12 million
Firm B:
Market value of debt: $6 million
Market value of equity: $7 million
Number of shares: 0.5 million
Estimated total firm value based on value-based management model: 15 million
Select one:
a. 2.1332, that is, 1 B share exchanges for 2.1332 A shares.
b. 1.0156, that is, 1 A share exchanges for 1.0156 B shares.
c. 1.4286, that is, 1 A share exchanges for 1.4286 B shares.
d. 2.1332, that is, 1 A share exchanges for 2.1332 B shares.
e. 1.4286, that is, 1 B share exchanges for 1.4286 A shares.
f. 1.0156, that is, 1 B share exchanges for 1.0156 A shares.
Explanation / Answer
Market value Equity of Firm B =$7,000,000
No of Shares of Firm B=500,000
Value per share for Firm B=Total Value/No of shares=$7,000,000/500,000=$14
Given in Problem:what is the stock exchange ratio if Firm A negotiates a merger with Firm B and if all the synergy gain goes to Firm A's shareholders
so
Total value of both firms=$12,000,000+$15,000,000=$27,000,000
Value of Equity firm A=Total value of both firms-Debt of both firms-Equity value firm B=$27 million-$4 million-$6 million-$7 million=$10 million
No of Shares of Firm A=500,000
Value per share for Firm A=Total Value/No of shares=$1,000,000/500,000=$20
so Exchange Ratio=Value per share of Firm A/Value per share of Firm B=$20/$14=1.4286 shares
c. 1.4286, that is, 1 A share exchanges for 1.4286 B shares.
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