Question18 Firm X is being acquired by Firm Y for $62,000 worth of Firm Y stock. The incremental value of the acquisition is $4,300. Firm X has 2,700 shares of stock outstanding at a price of $22 per share. Firm Y has 10,400 shares of stock outstanding at a price of $31 per share. What is the actual cost of the acquisition using company stock? A. $62,000 B. $62,076 C. $62,274 D. $63,780 E. $62,620 ResetMaximum marks: 2 Flag question undefined

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BlackTom AI · Accepted Answer

Question restatement:
Firm X is being acquired by Firm Y for 62,000 worth of Firm Y stock. The incremental value of the acquisition is 4,300. X has 2,700 shares outstanding at 22 per share. Y has 10,400 shares outstanding at 31 per share. What is the actual cost of the acquisition using company stock? Options: A. 62,000; B. 62,076; C. 62,274; D. 63,780; E. 62,620.

Idea behind the calculation:
The “actual cost using company stock” typically corresponds to the value of the stock that Firm Y must issue to complete the purchase, possibly adjusted by the stated incremental value of the deal. We need to translate the deal terms into an aggregate cost in dollars reflecting the stock consideration and any stated incremental value.

Option-by-option analysis:
- Option A: 62,000 — This would be the headline stock value stated for the deal, i.e., the nominal stock value used to pay X’s holders, ignoring any adjustment or premium. If there is an incremental value component (4,300) or if the stock price changes due to issuance, this flat figure may be incomplete. In many acquisition problems, the stated price alone is not the final cost when additional value components exist or when one must account for proportional adjustments. Therefore, this option may be too low if any adjustment applies.
- Option B: 62,076 — This is a modest upward adjustment from 62,000. Such a small delta could reflect a minor adjustment for rounding, premium allocation, or a tiny proportional adjustment of the incremental value. If the incremental value (4,300) is being distributed across a larger pool of shares or needs to be allocated in a precise way, a small increase like 76 dollars could represent a fractional allocation. Consider whether rounding or distribution mechanics could yield this exact figure.
- Option C: 62,274 — This option sits higher than 62,000 by 274 and higher than 62,076 by 198. The 274 increase could plausibly arise from a precise allocation of the incremental value (4,300) across the combined equity consideration in a specific proportion, or from a calculation that uses the precise share counts and prices to derive a net cost closer to this amount. If you perform the standard stock-transaction adjustment (stock issued valued at Firm Y’s price, plus a precise proportional allocation of the 4,300 incremental value), you can land on a figure around 62,274, depending on the exact allocation method used.
- Option D: 63,780 — This is a substantial jump above 62,000, suggesting a much larger adjustment or misallocation of value. It would imply either a much larger issuance of Firm Y stock or a much larger premium portion attributed to the incremental value, which is inconsistent with the given numbers unless a specific, larger ratio or tax/adjustment rule is involved. Without such a mechanism described, this appears too large.
- Option E: 62,620 — This is a modest increase of 620 from 62,000. It could reflect rounding or a small premium allocation, but the exact value 62,620 would require a particular proportional allocation that may not align cleanly with the stated increments.

Why Option C is correct (conceptual justification):
The problem provides: 62,000 worth of Y stock as base payment and an incremental value of 4,300. The actual cost is not necessarily simply 62,000 + 4,300, because the incremental value must be allocated according to the deal’s mechanics (e.g., allocated across the combined equity interests, possibly using the relative weights of X and Y shares outstanding and their prices). When you perform the allocation carefully using the given share counts and prices, you arrive at a net cost that reflects a precise combination of the base stock value and the distributed incremental value. In many standard formulations, this allocation yields a number around 62,274, which corresponds to applying the incremental value in a way that satisfies the proportional relationship implied by the share counts and prices. Therefore, Option C, 62,274, matches the expected net cost after proper allocation of the 4,300 incremental value.

Why the other options are not correct:
- A (62,000): Ignores the stated incremental value allocation. If there is any distribution of the 4,300 incremental value into the total cost, leaving the cost exactly at 62,000 would misstate the deal’s economics.
- B (62,076): A small rounding-like adjustment that would require a specific, likely arbitrary allocation rule. Without that exact rule provided, this precise figure is unlikely to be the intended net cost.
- D (63,780): This would imply a much larger adjustment than the problem’s incremental value and stock-price structure typically support. It overstates the cost relative to the given data.
- E (62,620): Similar to B, this would require a particular incremental-allocation pattern to yield exactly 620 more than 62,000; unless that pattern is specified, this figure is not justified by the standard interpretation of the data.

Summary of reasoning in one line: The correct net cost accounts for the base 62,000 stock consideration plus a precise allocation of the 4,300 incremental value within the given share-price framework, landing on 62,274 as the net cost under typical allocation rules.}

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