Calculate any incremental gain from the merger

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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.

Reference no: EM131574324

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