A local hospital offered to buy firm A in exercise 15.7 for $5,000, and the offer was refused. However, many observers now perceive that firm A is “in play” and may be sold if the right offer comes along.

a. In successful transactions, purchasers have typically paid ten times current profits. How much would firm A be worth to a buyer from outside the industry?

b. Would you expect that firm B would be willing to pay more or less than an outside buyer?

c. What is the most firm B would be willing to pay for firm A?

Exercise 15.7

Two physical therapy firms want to merge. The price elasticity of demand for physical therapy is −0.40. Firm A has a volume of 10,400, fixed costs of $50,000, marginal costs of $20, and a market share of 8 percent. Firm B has a volume of 15,600, fixed costs of $60,000, marginal costs of $20, and a market share of 12 percent. The merged firm has a volume of 26,000, fixed costs of $100,000, marginal costs of $20, and a market share of 20 percent.