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6 November, 21:33

Firm A is acquiring Firm B for $40,000 in cash. Firm A has 2,500 shares of stock outstanding at a market value of $18 a share. Firm B has 1,500 shares of stock outstanding at a market price of $25 a share. Neither firm has any debt. The net present value of the acquisition is $2,500. What is the value of Firm A after the acquisition?

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  1. 6 November, 21:58
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    The following multiple choices are missing:

    a. $40,000

    b. $42,500

    c. $48,500

    d. $47,500

    e. $50,000

    The correct option is D,$47,500 as shown in the calculation in the explanation section below

    Explanation:

    The value of Firm A after the acquisition is the market value of the original Firm A before acquisition plus the value of the firm acquired-that its net present value.

    Value of Firm A=A's shares*price per share+net present value of acquisition

    A's shares is 2,500

    price per share is $18

    Net present value of acquisition is $2,500

    Value of firm A = (2500*$18) + $2,500

    =$45000 + $2500

    =$47,500

    The value of the combined entity is $47,500
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