Discussion
Firm A has a value of $100 million, and B has a value of $70 million. Merging the two would allow a cost savings with a present value of $20 million. Firm A purchases B for $75 million. How much do firm A's shareholders gain from this merger?
Answer: C
Correct answer: $15 million
A’s shareholders receive the gain less the cost:
NPV = 20 - 5 = $15 million.
The $20 million created is split $15 million to the acquirer and $5 million to the target, and the split is decided entirely by the price negotiated. Had A paid $90 million, the cost would have been $20 million and A’s shareholders would have gained nothing.
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