Question

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. (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) what alternative should fly-by-night use? 8

Answer 1

The synergy from the merger is $350,000. The value of flash-in-the-pan to fly-by-night is $4,375,000. The stock offer is the more favorable option with a NPV of -$2,625,000.

Step-by-step explanation:

To determine the value of flash-in-the-pan restaurants to fly-by-night couriers, we first need to calculate the synergy from the merger. The synergy is the increase in annual aftertax cash flow, which in this case is $350,000. To calculate the value of flash-in-the-pan to fly-by-night, we can use the discounted cash flow method. The value can be calculated by dividing the increase in annual aftertax cash flow by the appropriate discount rate. In this case, the value of flash-in-the-pan to fly-by-night is $350,000 / 0.08 = $4,375,000.

To calculate the cost to fly-by-night of each alternative, we need to calculate the value of the stock and the cash offer. If fly-by-night offers 35% of its stock, the cost would be 35% of the market value of fly-by-night, which is $20 million. If fly-by-night offers $11 million in cash, the cost would be $11 million.

The NPV (Net Present Value) of each alternative can be calculated by subtracting the cost from the value. For the stock offer, the NPV would be $4,375,000 - $7 million = -$2,625,000. For the cash offer, the NPV would be $4,375,000 - $11 million = -$6,625,000.

Based on the NPV, the alternative with the higher value is more favorable. In this case, the stock offer has a higher NPV of -$2,625,000 compared to the cash offer with a NPV of -$6,625,000. Therefore, fly-by-night should use the stock offer as it has a higher net present value.