Osiris Inc. is considering the acquisition of a competitor, Polos Corp. Osiris expects that the purchase would add $800,000 to its annual cash flow from assets indefinitely. Both firms are fully equity financed and do not carry any debt. The current market value of Osiris is $50 million, and that of Polos is $30 million. Osiris's cost of capital is 8 percent. Osiris hesitates between offering $20 million in cash and offering 25 percent of its shares to Polos's shareholders.
a. What is the value of the acquisition to Osiris?
b. What is the cost of Polos to Osiris under each alternative?
c. What is the net present value of the purchase to Osiris?