Question

Firm A has a value of $200 million, and B has a value of $120 million. Merging the two would allow a cost savings with a present value of $30 million. Firm A purchases B for $130 million. How much do firm A's shareholders gain from this merger?A. $30 millionB. $20 millionC. $15 millionD. $10 million

Answer 1

Firm A's shareholders gain $20 million from the merger, which is calculated by subtracting the sum of Firm A's original value and the purchase price of Firm B from the combined value of both firms including the cost savings.

Step-by-step explanation:

To calculate how much Firm A's shareholders gain from the merger, we analyze the values and transaction details:

• Value of Firm A: $200 million
• Value of Firm B: $120 million
• Present value of cost savings from the merger: $30 million
• Purchase price of Firm B by Firm A: $130 million

After the merger, the combined value of both firms plus the cost savings is:

$200 million + $120 million + $30 million = $350 million
Firm A spent $130 million to purchase Firm B, so the total cost of acquisition is:

$200 million (original value of Firm A) + $130 million (purchase price) = $330 million
The gain for Firm A's shareholders is the combined value minus the total cost of acquisition:

$350 million - $330 million = $20 million
Therefore, Firm A's shareholders gain $20 million from this merger, which corresponds to option B.

Answer 2

A's shareholder would gain = $20 million

Step-by-step explanation:

Given:

Value of firm A = $200 million

Value of firm B = $120 million

Cost saving = $30 million

Computation:

Premium paid = $130 million - $120 million

Premium paid = $10 million

A's shareholder would gain = Cost saving - Premium paid

A's shareholder would gain = $30 million - $10 million

A's shareholder would gain = $20 million