Principal, Inc. is acquiring Secondary Companies for $29,000 in cash. Principal has 2,500 shares of stock outstanding at a market price of $30 a share. Secondary has 1,600 shares of stock outstanding at a market price of $15 a share. Neither firm has any debt. The net present value of the acquisition is $4,500. What is the price per share of Principal after the acquisition?

A) $30.00
B) $30.70
C) $31.80
D) $32.10
E) $32.50

Question

Kwame Waguespack · Accepted Answer

Final Answer : C, Explanation :  First, we need to calculate the total market value of each company:- Principal: 2,500 shares x $30 per share = $75,000- Secondary: 1,600 shares x $15 per share = $24,000Next, we need to calculate the total price for the acquisition:- $29,000 in cashThen, we need to calculate the total market value of both companies after the acquisition:- $75,000 + $24,000 + $29,000 = $128,000We also know that the net present value of the acquisition is $4,500. This means that the total market value of both companies before the acquisition was $128,000 - $4,500 = $123,500.Now, we can calculate the price per share of Principal after the acquisition:- ($75,000 + $29,000) / (2,500 shares + 1,600 shares) = $104,000 / 4,100 shares = $25.37 per share- Add the net present value per share: $4,500 / 4,100 shares = $1.10 per share- Add the original market price per share of Principal: $30 per share- Total price per share of Principal after the acquisition: $25.37 + $1.10 + $30 = $31.80 per shareTherefore, the best choice is C) $31.80.

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