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15 May, 13:41

Firm A is being acquired by Firm B for $35,000 worth of Firm B stock. The incremental value of the acquisition is $2,500. Firm A has 2,000 shares of stock outstanding at a price of $16 a share. Firm B

has 1,200 shares of stock outstanding at a price of $40 a share. What is the actual cost of

the acquisition using company stock?

a) $34,750 b) $34,789 c) $35,000 d) $35,289 e) $35,500

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Answers (1)
  1. 15 May, 13:48
    0
    option (b) $34,789

    Explanation:

    Data provided in the question:

    Worth of Firm A = $35,000

    Incremental value of the acquisition = $2,500

    Number of shares of Firm A outstanding = 2,000

    Price of Firm A shares = $16 per share

    Number of shares of Firm B outstanding = 1,200

    Price of Firm B shares = $40 per share

    Now,

    Number of shares issued = Worth of Firm A : Price per share of Firm B

    = $35,000 : $40

    = 875 shares

    Value per share after merger

    = [ (1,200 * $40) + (2,000 * $16) + $2,500 ] : [ 1,200 + 875 ]

    = $82,500 : 2,075

    = $39.759

    Therefore,

    The Actual cost of acquisition

    = Number of shares issued * Value per share after merger

    = 875 * $39.7588

    = $34788.95 ≈ $34,789

    Hence,

    The answer is option (b) $34,789
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