Western has a market value of $950 with 50 shares outstanding and a price per share of $19. Eastern has a market value of $3,000 with 120 shares outstanding and a price per share of $25. Eastern is acquiring Western by exchanging 40 of its shares for all 50 of Western's shares. What is the cost of the merger to Eastern's stockholders if the merger creates $200 of synergy?
A) $1,333.33
B) $1,225.00
C) $1,037.50
D) $1,000.00
E) $950.00
C) $1,037.50
Explanation: Combined firm value = $950 + 3,000 + 200
Combined firm value = $4,150
Total new shares = 120 + 40
Total new shares = 160
Western shareholders' ownership = 40/160
Western shareholders' ownership = .25
Western shareholders' value = Cost to Eastern's shareholders = .25($4,150)
Cost to Eastern's shareholders = $1,037.50
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