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Discussion

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. What is the cost of this merger?

  • A.$30 million
  • B.20 million
  • C.$15 million
  • D.$10 million

Answer: D

Correct answer: $10 million

The cost is the premium over B’s standalone value: 130 - 120 = $10 million. That is what B’s shareholders take out of the gain, and it is the figure the negotiation is really about.

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