Firms A and B have values as separate firms of 500 and 100, respectively, and both are all-equity firms. Firm A is going to buy firm B, and the merged firm will have a value of 700. Firm B is willing to sell to firm A for 150 in cash. Firm A has 25 shares before the merger and Firm B has 10 shares.

What is the NPV to firm A’s shareholders?

What cost would firm A’s shareholders see if this deal was paid for with stock and firm A exchanged 7.5 shares of new stock to buy firm B?

What exchange rate would make a stock deal the same cost to firm A’s shareholders, as the original cash deal?