Question 1

Firm B's 1 million shares of stock currently sell for $20 each. Firm A estimates that the merger with B will save the merged firm $1 million per year in production costs forever. The opportunity cost of capital is 10%. Firm A is prepared to offer $22 cash for each share of B.

(1) How much is the value of economic gain from this merger? What percent of the merger gain will be captured by Firm B's shareholders?

(2) What's the NPV of this deal?

(3) If Firm A's two million shares sell for $40 each before the merger, what will these shares sell for after the merger?

(4) Instead of paying cash, Firm A issues 0.55 share of its stock for every Firm B share acquired. What will be the price per share of the merged firm? What is the NPV of the merger to Firm A when it uses an exchange of shares?

(5) What fraction of the economic gain do Firm A shareholders receive? What fraction do Firm B shareholders receive? Why does your answer differ from Part (1)?