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 $330,000 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 would offer 35 percent of its stock or $13 million in cash to Flash-in-the-Pan.

a.	What is the synergy from the merger? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Synergy value

$

b.	What is the value of Flash-in-the-Pan to Fly-By-Night? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Value

$

c.	What is the cost to Fly-By-Night of each alternative? (Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

Cost of cash	$
Cost of stock	$

d.	What is the NPV to Fly-By-Night of each alternative? (Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

NPV of cash	$
NPV of stock	$

e.

What alternative should Fly-By-Night use?

	Stock offer
	Cash offer

Answer 1

a. Synergy = present value of incremental cash flows of the proposed purchase.

= 330,000/8%

= $4,125,000

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.

Thus V = 4,125,000+9 million (or 9,000,000)

= $13,125,000

c. Cost of cash = $13 million - $9 million

= $4,000,000

Stock alternative = 0.35*(13,125,000+23,000,000) – 9,000,000

= $3,643,750

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

NPV of cash alternative = 4,125,000 – 4,000,000

= $125,000

NPV of stock alternative = 4,125,000 – 3,643,750

= $481,250

e. Use the stock alternative, because its NPV is greater.