Calculate the share price of the merged firm

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Question - The financial manager of Firm BLACK is considering the possible purchase of Firm WHITE. The market value of Firm BLACK is £5,520m (2m shares traded on the stock exchange) before merger, while Firm White's market value is £560m (1.2m shares traded on the stock exchange) before merger. The manager would like to pay £840m to take over the Firm WHITE and expects that the market value of the combined firm would be worth £6,750m.

1) Suppose that Firm WHITE is bought for cash, calculate the cost and NPV of the merger from Firm BLACK's viewpoint.

2) If this merger is financed by stock, how many new shares Firm BLACK should issue and what is the exchange ratio? Calculate the share price of the merged firm?

Reference no: EM133170999

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