Palace Inns is acquiring Sequoia for $38,000 in cash. Palace Inns has 1,500 shares of stock outstanding at a market price of $26 a share. Sequoia has 1,800 shares of stock outstanding at a market price of $18 a share. Neither firm has any debt. The net present value of the acquisition is $1,400. What is the price per share of Palace Inns after the acquisition?

A) $23.20
B) $26.93
C) $35.47
D) $44.93
E) $47.26

Question

Nathan McCarthy · Accepted Answer

Final Answer : A, Explanation :  The correct answer is A.The net present value of the acquisition is $1,400. This means that the present value of the cash flows from the acquisition is $1,400 greater than the cost of the acquisition. The cost of the acquisition is $38,000. The present value of the cash flows from the acquisition is the sum of the present value of the cash flows from the acquired firm and the present value of the cash flows from the acquiring firm. The present value of the cash flows from the acquired firm is the sum of the present value of the cash flows from the acquired firm's assets and the present value of the cash flows from the acquired firm's liabilities. The present value of the cash flows from the acquired firm's assets is the sum of the present value of the cash flows from the acquired firm's operating assets and the present value of the cash flows from the acquired firm's non-operating assets. The present value of the cash flows from the acquired firm's operating assets is the sum of the present value of the cash flows from the acquired firm's sales and the present value of the cash flows from the acquired firm's expenses. The present value of the cash flows from the acquired firm's non-operating assets is the sum of the present value of the cash flows from the acquired firm's investments and the present value of the cash flows from the acquired firm's other non-operating assets. The present value of the cash flows from the acquired firm's liabilities is the sum of the present value of the cash flows from the acquired firm's debt and the present value of the cash flows from the acquired firm's other liabilities. The present value of the cash flows from the acquiring firm is the sum of the present value of the cash flows from the acquiring firm's assets and the present value of the cash flows from the acquiring firm's liabilities. The present value of the cash flows from the acquiring firm's assets is the sum of the present value of the cash flows from the acquiring firm's operating assets and the present value of the cash flows from the acquiring firm's non-operating assets. The present value of the cash flows from the acquiring firm's operating assets is the sum of the present value of the cash flows from the acquiring firm's sales and the present value of the cash flows from the acquiring firm's expenses. The present value of the cash flows from the acquiring firm's non-operating assets is the sum of the present value of the cash flows from the acquiring firm's investments and the present value of the cash flows from the acquiring firm's other non-operating assets. The present value of the cash flows from the acquiring firm's liabilities is the sum of the present value of the cash flows from the acquiring firm's debt and the present value of the cash flows from the acquiring firm's other liabilities.

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