Question
Firm A is contemplating the acquisition of firm B. Firm A has a market value of equity of $600 million and 30 million shares outstanding.
Firm A is contemplating the acquisition of firm B. Firm A has a market value of equity of $600 million and 30 million shares outstanding. Firm B has a market value of equity $200 million and 20 million shares outstanding. After the takeover, the market value of the combined firm will be $1 billion.
a) Suppose A offers cash to takeover B shares at a 10% premium. Compute the NPV of A and its share price after the takeover. (5 points)
b) Suppose A offers 10 million new shares to exchange for all of B shares. Compute the NPV of A and its share price after the takeover. (5 points)
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