Let's break down the problem step by step: --- ### **Question Recap** - **Firm A's value:** $50 million - **Firm B's value:** $11 million - **Merger gain (synergy):** $9 million - **Purchase price Firm A pays for Firm B:** $15 million - **Question:** What is the NPV (Net Present Value) of the acquisition? --- ## **Step 1: Find the Combined Value After Merger** Combined value = Value of A + Value of B + Synergy Combined value = $50M + $11M + $9M = **$70 million** --- ## **Step 2: Calculate the NPV of the Acquisition** **NPV of acquisition** = (Combined Value after acquisition) - (Value of both firms before acquisition) - (Cost paid for acquisition - Value of Firm B) But a simpler formula for NPV for the acquirer is: > **NPV = Synergy - Premium Paid** Where: - **Synergy** = $9 million (merger gain) - **Premium Paid** = Amount paid for Firm B - Value of Firm B Premium = $15M - $11M = $4M So, **NPV = $9M - $4M = $5M** --- ### **Answer:** > **The NPV of the acquisition is $5 million.** --- #### **Answer Choice:** - O $5 million (This is the correct choice) --- ### **Summary Table** | Component | Amount | |-------------------------|---------------| | Merger Gain (Synergy) | $9 million | | Premium Paid | $4 million | | NPV of Acquisition | $5 million | --- If you have any questions or want to see the logic in a different way, just ask!