Firm A is considering a merger/acquisition with Firm B. Firm A: Market value of
ID: 2817032 • Letter: F
Question
Firm A is considering a merger/acquisition with Firm B.
Firm A:
Market value of debt: $2 million
Market value of equity: $4 million
Number of shares: 200,000
Firm B:
Market value of debt: $5 million
Market value of equity: $5 million
Number of shares: 500,000
Investment rate for the combined firm (bA+B): 70%
WACC for the combined firm (WACCA+B): 10%
Total net operating income before synergy gain: (X): $3 million
Synergy rate (a): 15%
Corporate tax rate (T): 40%
Growth rate for the combined firm (g): 14.4%
Number of years for the growth: 10
According to the Weston/Copeland model, what is the total synergy gain from the merger?
Select one:
a. $29.22 million
b. $30.09 million
c. $33.67 million
d. $26.81 million
Explanation / Answer
Introduction :- The problem is related to mergers and acquisitions where A acquires B or B Merges with A. In the above Problem they have provided details :-
The net operating income before synergy gain is $3000000
Net Operating Income After Synergy gain and Tax 2070000
The growth rate for the combined firm (g)=14.4% and N=10 Years
Since A has acquired B because the share value of A is more than B 20>10 hence the share value will increase be $20 for both A and B. Hence the total synergy gain will be $26.81 million
Market Value of Shares (Value of each share) --Firm B 5000000/500000=$10 Market Value of debt---Firm B $5000000 Market Value of Shares-- Firm A $20 Market Value of debt---Firm A $2000000 Investment rate combined A+B 70% WACC Combined 10% Growth Rate 14.4%Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.