Answers to Chapter Review and Self Test Problems

25.1 The total value of Firm B to Firm A is the premerger value of B plus the $6,000 gain from the merger. The premerger value of B is $30 X 6,000 = $180,000, so the total value is $186,000. At $35 per share, A is paying $35 X 6,000 = $210,000; the merger therefore has a negative NPV of $186,000 - 210,000 = -$24,000. At $35 per share, B is not an attractive merger partner.

25.2 After the merger, the firm will have 700 shares outstanding. Because the total value is $63,000, the price per share is $63,000/700 = $90, up from $70. Because Firm B's stockholders end up with 100 shares in the merged firm, the cost of the merger is 100 X $90 = $9,000, not 100 X $70 = $7,000.

Also, the combined firm will have $3,000 + 1,100 = $4,100 in earnings, so EPS will be $4,100/700 = $5.86, up from $3,000/600 = $5. The old PE ratio was $70/5 = 14.00. The new one is $90/5.86 = 15.36.

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