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Quantum is planning on merging with Reliant Energy. Quantum currently has 80,000 shares of stock outstanding at a market price of $32.60 a share. Reliant Energy has 50,000 shares outstanding at a price of $24.50 a share. The merger will create $450,000 of synergy. How many of its shares should Quantum offer in exchange for all of Reliant Energy s share if it wants its acquisition cost to be $1,443,000?

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Answer:

The multiple choices are:

a.44,172

b.43,109

c.42,377

d.40,648

e.41,205

Option D,40,648 is the correct option

Explanation:

The number of shares to offer to Reliant energy would be the acquisition cost divided Quantum post acquisition share price

The share price can be computed thus:

Market of Reliant =$24.50*50,000=$1,225,000

Market value of Quantum=$32.60*80,000=$2,608,000

Reliant is now worth(acquisition cost)           =$1,443,000

Reliant shareholders' share of synergy=$1,443,000-$1,225,000=$218,000

Remnant of synergy left for Quantum=$450,000-$218,000=$232,000

Share price of Quantum post merger=($2,608,000+$232,000)/80,000=$35.5

Number of shares to issue to Reliant=$1,443,000/$35.5=40,648 shares

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