Suppose an acquirer firm, as a standalone business, has asset value VA = $25 millions, debt value DA = $6 millions; shares outstanding NA = 1.1 millions. Also, a target firm, as a standalone business, has asset value VT = $34 millions, no debt, shares outstanding NT = 1.260 millions. An investment bank has proposed a merger between the two firms with a synergy S = $8 millions.

The investment bank can earn a total fee F = $740,000 for its merger consultation services. The acquirer follows the investment bank’s advice to issue 1.6 million new shares for completing a stock swap.

1) Is this a feasible stock swap?

2) If a shareholder owns 500 old shares of the target firm, how many new shares can this

shareholder obtain by giving up these old shares?

3) What will be the post-merger share price of the acquirer firm?

4) What is the percentage better off in wealth for the acquire shareholders?

5) What is the percentage better off in wealth for the target shareholders?

6) What is the change in share price for the acquirer shareholders?

7) What is the change in share price for the target shareholders?

8) What is the diluted ownership for the acquirer shareholders given their 70%-split of the net

synergy, after paying the consultation fee to the investment bank?