Reference no: EM131577535

Q1. Firm A has a total value of US$10 million and firm B has a total value of US$5 million. If the two firms merge, there will be a cost saving of US$2 million. Calculate any incremental gain from the merger.

Q2. An excerpt from the financial data of firms A and B is given below. Both firms have agreed to merge with firm B taking over firm A. The exchange ratio for the merger will be 1:3, meaning that the stockholders of A will receive 1 share of firm B in lieu of every 3 shares they currently hold in firm A.

Item                                       Firm A                         Firm B

P/E Ratio                                 US8.192                      US16

Shares Outstanding                  96,000                        200,000

Earnings                                 US250,000                   US800,000

EPS                                        US$2.6042                   US4.00

It is estimated that the NPV from the acquisition will be zero, meaning that the benefits and costs of the merger will be equal.

Using the presented information, comment on whether the merger will lead to a growth in earnings for the combined firm.