Firm A tries to acquire Firm B. Assume that both firms have no debt outstanding. Firm A estimates that the value of synergistic benefits from Firm B is $10,000,000.

	Firm A	Firm B	Firm AB
			Cash acquisition	Stock acquisition
Earnings	$5,000,000	$1,000,000	$6,000,000	$6,000,000
Stock price	$40	$20	$ ( )	$ ( )
# of shares	1,000,000	500,000	1,000,000	( )

Supposed Firm A tries to acquire Firm B for $30 per share in cash.

1. Figure out the NPV of the merger.

2. Figure out the stock price of the merged firm.

Suppose Firm B prefers stock acquisition instead of cash acquisition of $30 per share. If Firm A offers one share for every two of Firm Bs shares.

1. Figure out the number of stocks and the stock price of the merged firm.

2. Figure out the NPV of the merged firm.

3. Figure out the share exchange ratio of Firm A to Firm B where the shareholders of Firm B are indifferent between cash acquisition and stock acquisition. (20points)