Firm A and Firm B in the following table are both all-equity firms. Firm A is trying to acquire Firm B. The CFO of Firm A believes that the acquisition will increase its total after-tax annual cash flows by $22,000 indefinitely and the appropriate discount rate for the cash flows is 10%.

	Before Acquisition
	Firm A	Firm B
Market value of the firm (VA, VB)	$600,000	$180,000
Number of shares outstanding	3,000	2,000
Market price per share	$200	$90

1. What is the estimated present value of the synergy of the merger after the acquisition?

2. What is the estimated market value of the new merged firm after the acquisition, that is, what is

V_AB?

3. What is the net present value (NPV) of the acquisition if Firm A is going to offer a cash payment of $250,000 to Firm B?

Should Firm A acquire Firm B using this cash payment?

4. If Firm A decides to use stock payment instead, what would be the proper exchange ratio of the two stocks to make the value of the stock offer equivalent to a cash offer of $250,000?