Nine Ltd. wants to buy Fairfax Ltd. The market value of Nine’s equity prior to the merger announcement is $33 million, or $3 per share. The market value of Fairfax’s equity prior to the merger announcement is $10 million or $2 per share. Merging the two companies is expected to generate $5 million of synergies. Nine has determined that Fairfax shareholders will accept an offer of 4 million newly issued shares of Nine for all the shares of Fairfax. Assuming no taxes or inside information, what would be the cost of the acquisition if Nine uses shares to acquire Fairfax?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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7. Nine Ltd. wants to buy Fairfax Ltd. The market value of Nine’s equity prior to the merger announcement is $33 million, or $3 per share. The market value of Fairfax’s equity prior to the merger announcement is $10 million or $2 per share. Merging the two companies is expected to generate $5 million of synergies. Nine has determined that Fairfax shareholders will accept an offer of 4 million newly issued shares of Nine for all the shares of Fairfax.

Assuming no taxes or inside information, what would be the cost of the acquisition if Nine uses shares to acquire Fairfax?       

Expert Solution
Step 1 NPV to nine=value of combined firm*% of ownership-value of nine ltd

No of existing shares=33/3=11 million

No of new shares=4 million

% of ownership after merger=11(11+4)=73.33%

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