Case I Cash Acquisition

The cost of an acquisition when cash is used is just the cash itself. So, if Firm A pays $150 in cash to purchase all of the shares of Firm B, the cost of acquiring Firm B is $150. The NPV of a cash acquisition is:

The acquisition is therefore profitable.

After the merger, Firm AB will still have 25 shares outstanding. The value of Firm A after the merger is:

This is just the premerger value of $500 plus the $50 NPV. The price per share after the merger is $550/25 = $22, representing a gain of $2 per share.

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