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 $370,000 indefinitely. The current market value of Flash-in-the-Pan is $9 million. The current market value of Fly-By-Night is $23 million. The appropriate discount rate for the incremental cash flows is 8 percent. Fly-By-Night is trying to decide whether it should offer 35 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?

Answer 1

Fly-By-Night Couriers can recognize a synergy of $4,625,000 from the merger with Flash-in-the-Pan Restaurants. The valuation of Flash-in-the-Pan to Fly-By-Night is $13,625,000. The stock alternative has a higher NPV, making it the preferred choice for the acquisition.

Step-by-step explanation:

To evaluate the merger and acquisition scenario for Fly-By-Night Couriers considering the acquisition of Flash-in-the-Pan Restaurants, we need to analyze several financial aspects including synergy, valuation, cost, and net present value (NPV).

a. Synergy from the merger

The synergy is the additional value created by combining the two companies, which can be estimated by the additional annual after-tax cash flow. Using the perpetuity formula, the value of the synergy = Annual after-tax cash flow / Discount rate, which gives us $370,000 / 0.08 = $4,625,000.

b. Value of Flash-in-the-Pan to Fly-By-Night

The value of Flash-in-the-Pan to Fly-By-Night is the sum of its standalone market value and the synergy from the merger, which would be $9,000,000 + $4,625,000 = $13,625,000.

c. Cost to Fly-By-Night of each alternative

The cost of the stock alternative would be 35% of Fly-By-Night's market value, which is 35% x $23,000,000 = $8,050,000. The cost of the cash alternative is simply $13,000,000.

d. NPV to Fly-By-Night of each alternative

To find the NPV for each alternative, we subtract the cost of the alternative from the value of Flash-in-the-Pan to Fly-By-Night. For the stock alternative, NPV = $13,625,000 - $8,050,000 = $5,575,000. For the cash alternative, NPV = $13,625,000 - $13,000,000 = $625,000.

e. Which alternative should Fly-By-Night use?

Fly-By-Night should use the alternative with the higher NPV, which is the stock alternative.

Answer 2

Step-by-step explanation:

a. The synergy will be the present value of the incremental cash flows of the proposed purchase.

Since the cash flows are perpetual, this amount is $370,000/.08

=$370000/.08

=$4,625,000

b

The value of Flash-in-the-Pan to Fly-by-Night is the synergy plus the current market value of Flash-in-the-Pan

= $4625000+9000000

=$13625000

c

stocked acquired = percentage age of ownership x value of merged firm

0.35 (13625000 + 23000000)

= $12818750

d

NPVs = Value of Flash-in-the-Pan to Fly-by-Night – (equivalent) cash offer =synergy – cost:

NPV of cash alternative = 13625000 – 13000000 = $625,000

NPV of stock alternative = 13625000 - 12818750 = $806,250

e

Use the Stock Alternative, Because NPV is better