After the merger, Arcadia Financial will have 125,000 [=10,000 + (50,000)(1/2)]
shares outstanding. The earnings of the combined firm will be $325,000. The
earnings per share of the combined firm will be $2.60 (=$325,000/125,000). The
acquisition will increase the EPS for the stockholders from $2.25 to $2.60.
First, find the pre-merger stock prices:
16 * $225,000
Share price of Arcadia =
12 * $100,000
Share price of Coldran =
Now, compare the relative value of these prices:
$24.00/$36 = 0.6667
Since the problem states that Coldran’s shareholders receive 0.5 shares of Arcadia for
every share of Coldran, synergies exist.
The synergy will be the present value of the incremental cash flows of the proposed
Since the cash flows are perpetual, this amount is
The value of Flash-in-the-Pan to Fly-by-Night is the synergy plus the current market
value of Flash-in-the-Pan.
The value of each alternative is:
Stock alternative = 0.25 ($26,000,000 + $35,000,000)
Since these values are already in PV terms, the NPVs are simply Value - Cost:
NPV of cash alternative
$26,000,000 - $15,000,000