Problem: 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 $600,000 indefinitely. The current market value of Flash-in-the-Pan is $20 million. The current market value of Fly-By-Night is $35 million. The appropriate discount rate for the incremental cash flows is 8 percent.
Q1. What is the synergy from the merger?
Q2. What is the value of Flash-in-the-Pan to Fly-By-Night? Fly-By-Night is trying to decide whether it should offer 25 percent of its stock or $15 million in cash to Flash-in-the-Pan.
Q3. What is the cost to Fly-By-Night of each alternative?
Q4. What is the NPV to Fly-By-Night of each alternative?
Q5. Which alternative should Fly-By-Night use?