Firm X and Firm Y are both 100% equity-financed. Firm X wants to acquire Firm Y for $165,000 in the form of either cash or stock. The synergy value of the deal is $25,000. You are given the following additional information:

FIRM X FIRM Y

Numbers of shares 20,000 9,750

Price per share $37.50 $15.00

a.What is the merger premium expressed as a percent of Firm Y's stock price? What is the NPV of the acquisition if cash is used? (3 marks)

b.What is the price per share of the post-merger firm following a cash acquisition?

c.What is the price per share of the post-merger firm if payment is made in stock?

d.What is the NPV of acquiring Firm Y when stock financing is used?