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CA Final · Advanced Financial Management · Mergers, Acquisitions and Corporate Restructuring

Firm A (value Rs 600 crore) and Firm B (value Rs 300 crore) are independent. Their combined value after merger is expected to be Rs 960 crore. Merger-related costs borne by A are Rs 20 crore. A pays Rs 330 crore in cash to B's shareholders. What is the net present value of the merger to Firm A's shareholders?

The NPV to Firm A is Rs 10 crore. Synergy is 960 less 900, which is Rs 60 crore. Firm A pays a Rs 30 crore premium to B's holders and bears Rs 20 crore of costs, leaving 60 minus 30 minus 20, which equals Rs 10 crore.

  1. ARs 30 crore
  2. BRs 10 croreCorrect
  3. CRs 60 crore
  4. DRs 40 crore

Explanation

Synergy gain = 960 - (600+300) = 60. Gain to B = 330 - 300 = 30 premium. Cost is already part of A's side: NPV to A = 60 - 30 premium - 20 costs = 10. Check: A's post-merger value = 960 - 330 = 630, minus 600 stand-alone = 30, less costs 20 = 10. Rs 30 crore ignores costs; Rs 40 crore adds costs in wrongly.

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