Firm A is worth $200 million as an independent firm and Firm B is worth $30 mill

ID: 2792922 • Letter: F

Question

Firm A is worth $200 million as an independent firm and Firm B is worth $30 million as an

independent firm. Firm A currently has 2 million shares outstanding and Firm B has 3 million

shares outstanding. If the firm's merge the total value of the merged firm is $240 million.

Suppose Firm A offers to buy Firm B for $13 a share and the board's of both firms have agreed to

the deal. However, the market is unsure whether regulators will approve the merger and thus

they believe that the deal will only go through with a probability of 1/2. Given this information:

(a) What would the stock price of Firm B to be immediately after the announcement of the

merger agreement?

(b) What would the stock price of Firm A be immediately after the announcement of the merger

agreement?

consummated. If the stock price of Firm B goes to $12 after the announcement, what would this

imply about the market's assessment of the probability that the deal is consummated

PART - A

Stock Price of Firm B after the announcement of merger agreement

Market Price of Share Firm A = $200 miillion /2 million dollor

=100 $

Market Price of Share Firm B = 30 million $ / 3 Million

= 10 $

Swap Ratio of Firm B = 10/100

=0.10 shares of Firm A

Total shares of Firm after Merger = 2,000,000+300,000(3,000,000*0.10)

=2,300,000

Firm B share value = 240 million $/23,000,000

=10.43

PART -B

Firm A Share Value = 240 million /2.3 million shares

=104.35

PART- C

Probability of Market assessment = 13*0.50/12

=0.5417 or 54.17%

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