Firm A wants to acquire Firm B and the financial details of the firms are:

If the merger is expected to bring gains which have a present value of ₹1,00,00,000 and Firm A offers one share for every two shares of Firm B to the shareholders of Firm B, the apparent cost of acquiring firm B is:

Correct option is D

Step 1: Calculate number of new shares issued by Firm A

Firm A offers 1 share for every 2 shares of Firm B.

Firm B has 5,00,000 shares, so the number of shares Firm A will issue is:

Step 2: Calculate total value of shares issued by Firm A

• Firm A’s market price per share = ₹50

• Total value of 2,50,000 shares: 2,50,000 × ₹50 = ₹1,25,00,000

This ₹1,25,00,000 is the total consideration paid by Firm A for acquiring Firm B. 

Step 3: Calculate the market value of Firm B (pre-merger)

Firm B has 5,00,000 shares at ₹20 each: 

5,00,000 × ₹20 = 1,00,00,000

Step 4: Calculate the apparent cost of acquisition

Apparent Cost of Acquisition = Market Value of New Shares Issued – Market Value of Target Firm (Firm B)

Hence, the apparent cost of acquisition = ₹1,25,00,000 – ₹1,00,00,000 = ₹25,00,000

​Thus, the apparent cost of acquisition is ₹25,00,000.

Information Booster:​

• Apparent cost refers to the extra amount paid over the standalone market value of the target company (Firm B), based on share exchange.

• It represents the premium paid by the acquiring firm (Firm A) for expected benefits.

• In this case, Firm A pays ₹1.25 crore in shares but the intrinsic market value of Firm B is only ₹1 crore.

• Hence, the ₹25 lakh premium is the apparent cost.

• This cost can be justified only if the merger synergy is realized, as given (₹1 crore).

• The net cost would be:
  Net Cost = Apparent Cost – Synergy = ₹25,00,000 – ₹1,00,00,000 = Negative, meaning merger is beneficial.

• But the question specifically asks for apparent cost, so we do not deduct synergy.