Question

Firm A has a value of $200 million, and B has a value of $120 million. Merging the two would allow a cost savings with a present value of $30 million. Firm A purchases B for $130 million. How much do firm A's shareholders gain from this merger?A. $30 millionB. $20 millionC. $15 millionD. $10 million

Answer 1

Answer:

A's shareholder would gain = $20 million

Explanation:

Given:

Value of firm A = $200 million

Value of firm B = $120 million

Cost saving = $30 million

Computation:

Premium paid  = $130 million  - $120 million

Premium paid = $10 million

A's shareholder would gain = Cost saving - Premium paid

A's shareholder would gain = $30 million - $10 million

A's shareholder would gain = $20 million