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 aftertax cash flow by $350,000 indefinitely. The current market value of Flash-in-the-Pan is $7 million. The current market value of Fly-By-Night is $20 million. The appropriate discount rate for the incremental cash flows is 8 percent. Fly-By-Night is trying to decide whether it would offer 35 percent of its stock or $11 million in cash to Flash-in-the-Pan.
1. What is the synergy from the merger?
2. What is the value of Flash-in-the-Pan to Fly-By-Night?
3. What is the cost to Fly-By-Night of each alternative?
4. What is the NPV to Fly-By-Night of each alternative?
5. What alternative should Fly-By-Night use?