You are a negotiated merger (Firm A) and try to use Value-Based management model

Question

You are a negotiated merger (Firm A) and try to use Value-Based management model to evaluate Firm B on your merger project. Your firm's market value of equity is $10,000 ($10 per share x 1,000 shares). Firm B's market value of equity is $3,500 ($7 per share x 5,00 shares) Synergy gain from the merger is $5,000. If all the synergy gain goes to your firm's (Firm A's) shareholders, what is the stock exchange ratio of Firm A share for Firm B shares? Select one: O a. one Firm A share for 2.1429 Firm B shares Ob. one Firm A share for 2.0382 Firm B shares Oc. one Firm A share for 1.9849 Firm B shares d. one Firm A share for 2.4567 Firm B shares

Explanation / Answer

Total Synergy Gain = $5000

Given That all the synergy gain will go to A's shareholders

So Value of Equity of A =$10000+5000

= $15000

Value of each share of B = $7

Value of Each Share of A = $15000/1000=$15

Exchange Ratio = Value per share of Firm A/Value per share of Firm B=

15/7 =2.1429

so, option A is answer

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