Firm A wants to acquire Firm B and the financial details of the firms are: A B Market Price per share…
Firm A offers 1 share for every 2 shares of Firm B's 500,000 shares, meaning Firm A issues 250,000 new shares to Firm B's shareholders. Evaluated at Firm A's pre-merger…
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Firm A wants to acquire Firm B and the financial details of the firms are: A B Market Price per share Rs. 50 Rs. 20 Number of shares 1,000,000 500,000 Market value of the firm Rs. 50 million Rs. 10 million If the merger is expected to bring gains which have a present value of Rs. 10 million and Firm A offers one share for every two shares of Firm B to the shareholders of Firm B, the apparent cost of acquiring firm B is:
Answer and explanation
Correct answer D
Firm A offers 1 share for every 2 shares of Firm B's 500,000 shares, meaning Firm A issues 250,000 new shares to Firm B's shareholders. Evaluated at Firm A's pre-merger market price of Rs. 50 per share, the apparent value paid is 250,000 × Rs. 50 = Rs. 12,500,000 (Rs. 12.5 million). Subtracting Firm B's standalone market value of Rs. 10,000,000 gives the apparent cost of acquiring Firm B = Rs. 12,500,000 - Rs. 10,000,000 = Rs. 2,500,000.
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UGC NET Management