Question

Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total aftertax annual cash flows by $1 million indefinitely. The current market value of Teller is $53 million, and that of Penn is $87 million. The appropriate discount rate for the incremental cash flows is 10 percent. Penn is trying to decide whether it should offer 40 percent of its stock or $59 million in cash to Teller's shareholders. a. What is the cost of each alternative? (Enter your answers in dollars, not millions of dollars, e.g., 1,234,567.) b. What is the NPV of each alternative? (Enter your answers in dollars, not millions of dollars, e.g., 1,234,567.) c. Which alternative should Penn choose? Acquire the company for stock. Acquire the company for cash.

Answer 1

acquisition of Solutions Penn loop is analyzing Teller Corporation @) lost of each alternativel = = = There are acquire by two alternatives paying cash or for Penn stock. corp. whether . to Cach Lost - $ 59,000,000 Now, we need to calculate stock lost. For that, we need value of target firm to the acquiring firm. Value of target from to the acquiring from = Maurket value of target firm t Present value of incremental cash flows generated by the target firm. > $ 53,000,000 + $ 1 million 0.10 { $ 53,000,000$10,000,000 2$ 63,000,000 Present value of was incremental cash flows generated by target firm is calculated by dividing the incremental cash flows with loy Discount rate because it is believed that incremental cash flows are for indefinite time period that mean perpetual,

Cost of stock offer is that percentage of stock given of combined value of target firm and acquiring firm (after acquistion), combined value of firm after acquisition - = Market value of acquiring firm of value of Torget - firm to acquiring firm a $ 87,000,000 + $ 63,000,000 = $ 150,000,000 - cost of stock offer a 40% of Total value of combined fioni 2 0,40 y $ 150,000,000 = $60,000,000 (b) Calculate NPU of both alternativen Cash offer Total value of combined firm = $150,000,000 Cash Lost - $59,000,000 NPU= Total value - lash cost $150,000000 - $ 59,000,000 a $ 91,000,000

Stock offer NPU= Total value of combined firm Cost of stock offer z $ 150,000,000 - $ 60,000,000 = $ 90,000,000 (c) Penn loop is higher in offer. should choose cash offer as NPV lash offer as compared to equity Stock