Hey - I saw this question in a guide but don't really understand it:
Company A has a market capitalization of $6B and purchases Company B at a market capitalization of $3B. If Company A owns 75% of the pro forma company, how much cash did it use in the transaction?
The first clue is that Company A's shareholders own 75% of the pro forma company. Because all of the shares of Company B disappear after the transaction closes, the implied market capitalization of the pro forma company is equal to $8B ($6B / 75%). The pro forma value of the company is equal to $9B (Company A $6B + Company B $3B), so the difference of $1B must be cash. This transaction says that Company B shareholders own $2B of stock in the pro forma company and were paid $1B in cash in exchange for their old shares worth $3B.
I'm not sure why we are comparing the PF market cap/value of the companies and why we are the implied market cap would be $8B/75%. Any help would be great - thanks.
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