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A bidding firm, A, is worth $27,000 as a stand-alone entity. A target firm, B, is worth $12,000 as a stand-alone entity, but $18,000 if it is acquired and integrated with Firm A. Several other firms are interested in acquiring Firm B, and Firm B is also worth $18,000 if it is acquired by these other firms. If A acquired B, would this acquisition create value? If yes, how much? How much of this value would the equity holders of A receive? How much would the equity holders of B receive?

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Answer and Explanation:

According to the scenario, computation of the given data are as follow:-

Firm A’s worth as a stand-alone entity = $27,000

Firm B’s worth as a stand-alone entity = $12,000

But if Firm A acquired Firm B it’s increase worth of Firm B at $18000.

Firm A is acquired Firm B, this acquisition create value of

= $18,000 - $12000

= $6000.

With this acquisition equity holders of Firms received $18,000 which is $6,000 more than Firm B stand alone.

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