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Penn Corp. is analyzing the possible acquisition of Teller's Company. Both firms have no debt. Penn...

Penn Corp. is analyzing the possible acquisition of Teller's Company. Both firms have no debt. Penn believes the acquisition will increase its total after-tax annual cash flow by $1.1 million indefinitely. The current market value of Teller's is $45 million, and that of Penn is $62 million. The appropriate discount rate for the incremental cash flows is 12%. Penn is trying to decide whether it should offer 40% of its stock or $48 million in cash to Teller's shareholders.  

  1. What is the cost of each alternative?
  2. What is the NPV of each alternative?
  3. Which alternative should Penn choose?
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Answer #1

a) Cash cost $ 48,000,000 Equity cost $ 46,466,667 +(62000000+45000000+1100000/12%)*40% b) NPV cash NPV stock $ 6,166,667 =(4

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