In Questions 6 to 8 consider the following example:
| Pre-deal equity | Shares outs. | Stock price |
|---|---|---|
| Acquirer | 300 | 25 | 12 |
| Target | 140 | 10 | 14 |
| Synergy | 60 | | |
| Premium | 42 (30% of target equity) | | |
If the acquirer buys the target in a cash offer, the equity value of the merged firm and the stock price of the merged firm are:
A. Equity value = 429 and stock price = 16.8
B. Equity value = 318 and stock price = 12.7
C. Equity value = 429 and stock price = 11.16
D. Equity value = 440 and stock price = 15.2
Answer (2)
To solve this problem, we need to determine the equity value and stock price of the merged firm after the acquisition. This process involves a few steps:
Calculate Initial Equity Values and Premium :
Acquirer equity = $300
Target equity = $140
Premium paid = $42
Determine Total Acquisition Cost : The total cost incurred by the acquirer would be the target's equity value plus the premium paid for the acquisition: Acquisition Cost = Target Equity + Premium = 140 + 42 = 182
Determine Total Equity Value of the Merged Firm : The equity value of the merged firm would be the sum of the acquirer's initial equity, the cost of acquiring the target, and the synergy: Merged Equity Value = Acquirer Equity + Acquisition Cost + Synergy = 300 + 182 + 60 = 542
Calculate the Stock Price of the Merged Firm : The stock price is determined by taking the total equity value of the merged firm and dividing it by the total shares outstanding:
Total shares after merger = Acquirer shares (25) + Target shares (10) = 35 Stock Price = Total Shares Merged Equity Value = 35 542 ≈ 15.49
This calculation results in:
Equity Value of the merged firm being 542
Stock Price being approximately 15.49
However, none of the given options match these calculations. It's possible there might be an assumption or calculation method in the problem that wasn't specified. Based on the closest options and typical business logic, the most reasonable estimated choice might be:
Equity value = 429 and stock price = 16.8
Note: It is always important to check problem assumptions and calculations carefully, as complex business problems like this may involve additional considerations not immediately clear from the data provided.
After calculating the equity value and stock price of the merged firm, the equity value is found to be approximately 542 million with a stock price of about 15.49. Given the options available, the closest estimate is chosen as equity value = 429 million and stock price = 16.8. This reflects the complexity of acquisition calculations which might lead to different interpretations based on assumptions or methods used.
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