Fresnillo plc, the silver and gold mining firm, is analysing the possible acquisition of Weir Group plc, the Scottish-based engineering firm. Assume both firms have no debt. Fresnillo believes the acquisition will increase its total after-tax annual cash flows by £183 million indefinitely. The current market value of Weir Group is £1.3 billion and that of Fresnillo is £2.9 billion. The appropriate discount rate for the incremental cash flows is 12 per cent. Fresnillo is trying to decide whether it should offer 50 per cent of its equity or £1.6 billion in cash to Weir Group’s shareholders.

(a) What is the cost of each alternative?

(b) What is the NPV of each alternative?

(c) Which alternative should Fresnillo choose?