Patriots Corp. is analyzing the possible acquisition of Jets Company. Both firms have no debt. Patriots believe the acquisition will increase its total after tax annual cash flow by $1.5 million indefinitely. The current market value of Jets is $48 million, and that of Patriots is $70 million. The appropriate discount rate for the incremental cash flows is 12.5 percent. Patriots are trying to decide whether they should offer 45 percent of their stock or $52 million in cash to Jets’ shareholders.
a. What is the cost of each alternative?
b. What is the NPV of each alternative?
c. Which alternative should Penn choose?