Quantum is planning on merging with Reliant Energy. Quantum currently has 80,000 shares of stock outstanding at a market price of $32.60 a share. Reliant Energy has 50,000 shares outstanding at a price of $24.50 a share. The merger will create $450,000 of synergy. How many of its shares should Quantum offer in exchange for all of Reliant Energy s share if it wants its acquisition cost to be $1,443,000?

The multiple choices are:

a. 44,172

b. 43,109

c. 42,377

d. 40,648

e. 41,205

Option D, 40,648 is the correct option

Explanation:

The number of shares to offer to Reliant energy would be the acquisition cost divided Quantum post acquisition share price

The share price can be computed thus:

Market of Reliant = $24.50*50,000=$1,225,000

Market value of Quantum=$32.60*80,000=$2,608,000

Reliant is now worth (acquisition cost) = $1,443,000

Reliant shareholders' share of synergy=$1,443,000-$1,225,000=$218,000

Remnant of synergy left for Quantum=$450,000-$218,000=$232,000

Share price of Quantum post merger = ($2,608,000+$232,000) / 80,000=$35.5

Number of shares to issue to Reliant=$1,443,000/$35.5=40,648 shares