Merger NPV Fly-by-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants. Neither firm has debt. The forecasts of Fly-by-Night show that the purchase would increase its annual after tax cash flow by $400,000 indefinitely. The current market value of Flash-in-the-Pan is $11 million. The current market value of Fly-by-Night is $18 million. The appropriate discount rate for the incremental cash flows is 9 percent. Fly-by-Night is trying to decide whether it should offer 40 percent of its stock or $13 million in cash to Flash-in-the-Pan.
a. What is the synergy from the merger?
b. What is the value of Flash-in-the-Pan to Fly-by-Night?
c. What is the cost to Fly-by-Night of each alternative?
d. What is the NPV to Fly-by-Night of each alternative?
e. Which alternative should Fly-by-Night use?