Question

Penn Corporation is analysing the possible acquisition of Teller Company. There are two alternatives for Penn: to use cash or stock as payment. Both firms have

no debt. Penn believes the acquisition will increase its total after-tax annual cash flow by €1.3 million indefinitely. The current market value of Teller is €27

million, and that of Penn is €62 million. The appropriate discount rate for the incremental cash flows is 10 percent. Penn is trying to decide whether it should

offer 35 percent of its stock or €37 million in cash to Teller’s shareholders.

Instructions:

a. What is the cost of each alternative? (5 points)

b. What is the NPV of each alternative? (5 points)

c. Which alternative should Penn choose? (5 points)

d. What are some important factors in deciding whether to use stock or cash in an acquisition? (10 points)

e. Explain what defensive tactics the managers of Teller Company could use to resist acquisition. (5 points)

Answer 1

Solution:-

To calculate The Cost of Each Alternative-

Cash Cost (Given in Question) = $37,000,000

Equity Cost =

Equity Cost =

Equity Cost = $40,800,000

To Calculate NPV of each alternative-

NPV Cash =

NPV Cash =

NPV Cash = $30,00,000

NPV Stock =

NPV Stock =

NPV Stock = -8,00,000

Select Cash Option as NPV is Greater than or equal to zero.

If you have any query related to question then feel free to ask me in a comment.Thanks.