Consider the following premerger information about Firm A and Firm T. Firm A is analyzing the possible acquisition of Firm. Neither firm has debt. The forecasts of Firm A show that the purchase would increase its annual after-tax cash flow by $1,000,000 indefinitely. The current market value of firm A is $50 million. The appropriate discount rate for the incremental cash flows is 10 percent. Firm A is trying to decide whether it will offer 25 percent of the stock of merged firm or $22 million in cash to firm T.
a. Find the value of synergy from the merger.
b. Find the value of Firm T to Firm A.
c. Compute the cost of Firm A of each alternative,
d. Calculate the net present value (NPV) to firm A of each Alternative.
e. What alternative should Firm A use?