Question15 Firm X is being acquired by Firm Y for $62,000 worth of Firm Y stock. The incremental value of the acquisition is $4,300. Firm X has 2,700 shares of stock outstanding at a price of $22 per share. Firm Y has 10,400 shares of stock outstanding at a price of $31 per share. What is the actual cost of the acquisition using company stock? $62,000 $62,076 $62,274 $63,780 $62,620 ResetMaximum marks: 3 Flag question undefinedSingle choice
A
$62,000
B
$62,076
C
$62,274
D
$63,780
E
$62,620

Question

Question15 Firm X is being acquired by Firm Y for $62,000 worth of Firm Y stock. The incremental value of the acquisition is $4,300. Firm X has 2,700 shares of stock outstanding at a price of $22 per share. Firm Y has 10,400 shares of stock outstanding at a price of $31 per share. What is the actual cost of the acquisition using company stock? $62,000 $62,076 $62,274 $63,780 $62,620 ResetMaximum marks: 3 Flag question undefinedSingle choice

A

$62,000

B

$62,076

C

$62,274

D

$63,780

E

$62,620

BlackTom AI · Accepted Answer

When an acquisition is paid with stock, the acquirer issues shares to the target; the actual cost to the acquirer equals the value of those shares at the new, post-merger market price (which reflects the combined firm value including any incremental value/synergy).

Relevant concepts:
- Market value of a firm = shares outstanding × share price.
- Number of shares issued = cash-equivalent offer ÷ acquirer’s pre-deal share price.
- Combined firm value after the deal = sum of pre-deal market values + incremental (synergy) value.
- New share price = combined firm value ÷ combined shares outstanding.
- Actual cost (in stock) = number of shares issued × new share price.

Step-by-step calculation with intermediate steps:
1. Compute pre-deal market values:
   - Firm X = 2,700 shares × $22 = $59,400.
   - Firm Y = 10,400 shares × $31 = $322,400.

2. Number of Firm Y shares issued to buy Firm X:
   - Shares issued = $62,000 ÷ $31 = 2,000 shares.

3. Combined firm value after including incremental value:
   - Combined value = $59,400 + $322,400 + $4,300 = $386,100.

4. Combined shares outstanding after issuance:
   - Total shares = 10,400 + 2,000 = 12,400 shares.

5. New post-merger share price:
   - New price = $386,100 ÷ 12,400 = $31.13709677 (approx).

6. Actual cost in stock (value of shares transferred at post-merger price):
   - Actual cost = 2,000 shares × $31.13709677 ≈ $62,274.19 → $62,274.

Why the correct answer is correct:
- The acquirer gave 2,000 shares. Those shares are worth the new market price, which incorporates the $4,300 incremental value. Thus the true economic cost (value given up) is 2,000 × new price = $62,274 (rounded), not the pre-deal quoted $62,000.

Why the other choices are incorrect:
- $62,000 is the nominal pre-deal stock value offered, not the post-merger value of the shares issued.
- $62,076 and $62,620 are inconsistent with the precise post-merger price calculation (they result from incorrect rounding or arithmetic).
- $63,780 is substantially higher and does not follow from the correct counts and combined-value calculation.