Firm A is being acquired by Firm B for $35,000 worth of Firm B stock. The incremental value of the acquisition is $2,500. Firm A has 2,000 shares of stock outstanding at a price of $16 a share. Firm B

has 1,200 shares of stock outstanding at a price of $40 a share. What is the actual cost of

the acquisition using company stock?

a) $34,750 b) $34,789 c) $35,000 d) $35,289 e) $35,500

option (b) $34,789

Explanation:

Data provided in the question:

Worth of Firm A = $35,000

Incremental value of the acquisition = $2,500

Number of shares of Firm A outstanding = 2,000

Price of Firm A shares = $16 per share

Number of shares of Firm B outstanding = 1,200

Price of Firm B shares = $40 per share

Now,

Number of shares issued = Worth of Firm A : Price per share of Firm B

= $35,000 : $40

= 875 shares

Value per share after merger

= [ (1,200 * $40) + (2,000 * $16) + $2,500 ] : [ 1,200 + 875 ]

= $82,500 : 2,075

= $39.759

Therefore,

The Actual cost of acquisition

= Number of shares issued * Value per share after merger

= 875 * $39.7588

= $34788.95 ≈ $34,789

Hence,

The answer is option (b) $34,789