Discussion
Firm A has 100 shares outstanding at a market price of $100 each and total earnings of $600. Firm B has 100 shares outstanding at a market price of $16 each and total earnings of $200. The merger is expected to produce synergies with a present value of $600.
What will be the post-merger price per share for Firm A's stock if Firm A pays in cash at $20 per share for Firm B?
Answer: C
Correct answer: $102
Paying cash, A’s share count is unchanged at 100. Its value becomes its own $10,000, plus B’s $1,600, plus the $600 synergy, less the $2,000 paid out - that is $10,200. Dividing by 100 shares gives $102, a rise of exactly the $200 NPV spread over the existing shares.
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