Suppose firm Aand firm Bhave values as separate entities of $15M and $3M, respectively. They are both all-equity firms. If firmA acquires firm B, the merged firm AB will have a combined value of $20.5M due to synergies of $2.5M. The board of firm Bhas indicated that it will sell firm B if it is offered $4M in cash. 

a) Assuming that firm A finances the acquisition out of its own retained earnings and there are 2M shares in firm A. What is the NPV of the merger? What is the stock price after the merger? What is the cost of the merger? Should firm A acquire firm B?

b) Suppose A purchases B with common stock instead of cash. The exchange ratio is 0.6. There are 1M shares in firm B. What is the stock price after the merger? What is the cost of the merger? Should firm A acquire firm B? 

c) Explain what are staggered board and golden parachute. 

Answer rating: 100% (QA)

a The NPV of the merger is 15M The stock price after the mer... View the full answer