Question 3 Firm C is bidding to take over firm D. Firm C has 3,000 shares outstanding, selling at $40 per share. Firm D has 2,000 shares outstanding, selling at $20 a share. Firm C estimates the economic gain from the merger to be $20,000. a) If D can be acquired for $25 a share, what is the NPV of the merger to C? (10 marks) b) What will C sell for when the market learns that it plans to acquire D for $25 a share? What will D sell for? (5 marks) c) Now suppose that the merger takes place through an exchange of stock. Based on the pre- merger prices of the firms, C sells for $40, so instead of paying $25 cash, C issues 0.60 of its shares for every D share acquired. What will be the price of the merged firm? What is the NPV of the merger to C? Why does your answer differ from part (a)? (10 marks)