Jay's has a market value of $3,600 and believes that if it acquires Benny's in a stock transaction the combination of the new firm will be worth $6,000 given the expected synergy of $200.If Jay's wants to keep 75 percent of the synergy for itself,what should be the value of the stock it issues to Benny's?
A)$2,050
B)$2,250
C)$2,150
D)$2,000
E)$2,500

Question

Quizplus · Accepted Answer

To calculate the value of stock to be issued to Benny's, we need to first calculate the expected value of the new firm after the acquisition:

Expected value of new firm = initial market value + synergy
= $3,600 + $200
= $3,800

Jay's wants to keep 75% of the synergy for itself, so the remaining 25% ($50) will go to Benny's. To determine the value of the stock to be issued, we need to divide this amount by the fraction of new firm owned by Benny's after the acquisition. Let x be the fraction of new firm owned by Benny's after the acquisition. Then, we have:

$2,250 = $50 / x
x = $50 / $2,250
x = 0.0222

Therefore, Benny's will own 2.22% of the new firm after the acquisition.

Jay's Has a Market Value of $3,600 and Believes That