Firm A has a value of $200 million and Firm B has a value of $120 million. Merging the two would enable cost savings with $3 million in perpetuity. Firm A acquires Firm B for $130 million in cash. Assuming the cost of capital for the new firm is 10% p.a. How much do Firm A's shareholders gain from this merger?
Added by Brenda S.
Step 1
Since the cost savings are perpetual, we can use the perpetuity formula: NPV = Cost savings / Cost of capital NPV = $3 million / 0.1 = $30 million Show more…
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