Question 2 (30 points):

Consider the following information for two all-equity firms, Firm A and Firm B:

Firm A Firm B

Shares outstanding 2,000 6,000

Price per share $ 40 $ 30

Firm A estimates that the value of the synergistic benefit from acquiring Firm B is $6,000. Firm B has indicated that it would accept a cash purchase offer of $35 per share. Should Firm A proceed?

Question 3 (30 points):

Consider the following information for two all-equity firms, Firm A and Firm B:

Firm A Firm B

Total earnings $3,000 $1,100

Shares outstanding 600 400

Price per share $ 70 $ 15

Firm A is acquiring Firm B by exchanging 100 of its shares for all the shares in Firm B.

1. What is the cost of the merger if the merged firm is worth $63,000? (20 points)

2. What will happen to Firm As EPS? Its P/E ratio?(10 points)