company a plans on acquiring company b making a cash offer of $27 per share for
ID: 2804858 • Letter: C
Question
company a plans on acquiring company b making a cash offer of $27 per share for all 100,000 shares of company b. company a estimates that the merger will produce cost savings with a present value of $800000. recently, company b's stock increased in price from $20 to $24 per share based on good operating results. company a estimates that company b's fair market value is $24 per share. the cfo of company a has suggested a reevaluation of its offer for company b, pointing out that the true stand alone value of company b may be $20 per share and not $24 per share and certainly not the offer price of $27 per share. IF he is correct that the fair market value for company b is $20 per share, will the merger generate a positive NPV for company a? Pick one of the two answers and explain your choice in a few sentences.
no- the cost to acquire company b stock at $27 per share will exceed the post merger gain of $800000.
yes.. company a will still experience an NPV gain, although company b will capture more of the economics value of the transaction.
Explanation / Answer
yes.. company a will still experience an NPV gain, although company b will capture more of the economics value of the transaction.
The minimum value for acquistion is equal to stand-alone price so company minimum value for acquisition is $20 per share so $4 ($24-20) is the merger premium that represents the amount paid above the stand-alone value. This will still generate positive NPV for Company A.
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