Suppose you have the following information concerning an acquiring ﬁrm (A) and a target ﬁrm (B). Neither ﬁrm has any debt. The incremental value of the acquisition is estimated to be $250,000.
Firm B is willing to be acquired for $540,000 worth of Firm A's stock. What are the synergistic beneﬁts that arise from the acquisition of Firm B?
A) $138,000
B) $250,000
C) $405,000
D) $655,000
E) $920,000

Question

Suppose you have the following information concerning an acquiring ﬁrm (A) and a target ﬁrm (B). Neither ﬁrm has any debt. The incremental value of the acquisition is estimated to be $250,000.
Firm B is willing to be acquired for $540,000 worth of Firm A's stock.  What are the synergistic beneﬁts that arise from the acquisition of Firm B?
A) $138,000 
B) $250,000 
C) $405,000 
D) $655,000 
E) $920,000

Quizplus · Accepted Answer

The incremental value of the acquisition is $250,000, which means that the synergy gained from the acquisition is $250,000.
The price that Firm A pays to acquire Firm B is $540,000 worth of its own stock. Therefore, the synergistic benefits gained from the acquisition are $540,000 - $250,000 = $290,000.
However, the question asks for the synergistic benefits that arise from the acquisition, which means that we need to subtract the pre-acquisition value of Firm B from the synergistic benefits gained. Since no debt is involved, the pre-acquisition value of Firm B is simply the price that Firm A is paying to acquire it, which is $540,000. Therefore, the synergistic benefits that arise from the acquisition of Firm B are $290,000 - $540,000 = -$250,000. However, since the question asks for the absolute value of the synergistic benefits, the answer is $250,000.

Suppose You Have the Following Information Concerning an Acquiring ﬁRm