Question

Blenheim plc has a market value of 124 million and 6 million shares outstanding. Howard department store has a market value of 30 million and 2 million shares outstanding. Blenheim is contemplating acquiring Howard. Blenheim's CFO concludes that the combined firm with synergy will be worth 173 million, and Howard can be acquired at a premium of 10 million. What is the NPV of the merger?

Answer 1

The NPV of the merger is $154 million.

Step-by-step explanation:

The NPV (Net Present Value) of the merger can be calculated by subtracting the cost of acquisition from the combined firm's market value. In this case, the market value of Blenheim is $124 million, and the market value of Howard is $30 million. The premium for acquiring Howard is $10 million. Therefore, the combined firm's market value after the merger would be $124 million + $30 million + $10 million = $164 million.

To calculate the NPV, we subtract the cost of the acquisition ($10 million) from the combined firm's market value ($164 million). The NPV of the merger would be $164 million - $10 million = $154 million.