Firms A and B,both all-equity financed,are merging.Prior to merge,Firm A,having 100 shares outstanding,is worth $15,000,while Firm B has 50 shares outstanding worth $10,000.The combined firm will be worth $30,000.Firm A pays $11,500 in cash for Firm B.What is the net benefit of the merger to Firm A?

A) $3,500
B) $5,000
C) $11,500
D) $18,500

Question

Wesley Glenn · Accepted Answer

Final Answer : A, Explanation :  Before the merge,Firm A value per share = $15,000/100 shares = $150 per shareFirm B value per share = $10,000/50 shares = $200 per shareThe merged firm will have 150 shares outstanding (100 from Firm A and 50 from Firm B) and a value of $30,000, making the value per share $200.Firm A paid $11,500 in cash for Firm B, which means Firm B is valued at $11,500.Firm A's post-merge value will be $15,000 + $11,500 = $26,500.Firm A's net benefit is the difference between its pre-merge and post-merge value minus the cash paid for Firm B:$26,500 - $15,000 - $10,000 = $1,500Therefore, the net benefit of the merger to Firm A is $3,500 (the cash paid for Firm B plus the net benefit: $11,500 + $1,500). Answer choice A is the correct answer.

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