Chapter 29, Problem 12QP

a.

Summary Introduction

To calculate: The value of synergy from the merger.

Merger:

Merger occurs when the shareholders of two or more companies pool the resources of their company into one separate legal entity and as a result a new company comes into existence. Merger is basically the result of merge of two or more companies into one.

Synergy:

Synergy is a state in which two or more companies are combined to perform better than the sum of their individual efforts in terms of productivity, revenue and so forth.

Net Present Value (NPV):

Net present value is one of the techniques of capital budgeting. Net present value is used to find out the difference between the present value of cash inflow and present value of cash outflow.

Cash vs. Stock Payment Method:

Cash versus stock payment method is one of the methods of payment where the acquiring firm has to decide when do the acquiring firm have to pay with cash or when do the acquiring firm have to pay with stock to the target company.

Purchase Accounting Method for Mergers:

In the purchase accounting method, the assets of the targeted company have to be recorded into the current market value in the books of acquiring company and goodwill assets account have to be created. Goodwill is the difference of current market value and purchase price.

b.

Summary Introduction

To compute: The value of firm FP to Firm FN.

c.

Summary Introduction

To calculate: The cost of FN of each alternative.

d.

Summary Introduction

To calculate: The NPV of each alternative.

e.

Summary Introduction

To decide:-The alternative that must be used by the Firm FN