Question

Firm A is acquiring Firm B for $40,000 in cash. Firm A has 2,500 shares of stock outstanding at a market value of $18 a share. Firm B has 1,500 shares of stock outstanding at a market price of $25 a share. Neither firm has any debt. The net present value of the acquisition is $2,500. What is the value of Firm A after the acquisition?

Answer 1

The following multiple choices are missing:

a. $40,000

b. $42,500

c. $48,500

d. $47,500

e. $50,000

The correct option is D,$47,500 as shown in the calculation in the explanation section below

Step-by-step explanation:

The value of Firm A after the acquisition is the market value of the original Firm A before acquisition plus the value of the firm acquired-that its net present value.

Value of Firm A=A's shares*price per share+net present value of acquisition

A's shares is 2,500

price per share is $18

Net present value of acquisition is $2,500

Value of firm A=(2500*$18)+$2,500

=$45000 +$2500

=$47,500

The value of the combined entity is $47,500