Tazza is analysing the possible acquisition of Bichiery. Neither firm has debt.

The forecasts of Tazza show that the purchases would increase its annual after-tax cash flow by £1.3 million indefinitely. The current market value of Bichiery is £500 million. The current market value of Tazza is £1.5 billion. The appropriate discount rate for the incremental cash flows is 8 per cent. Tazza is trying to decide whether it would offer 40 per cent of its equity or £600 million in cash to Bichiery.

(a) What is the synergy from the merger?

(b) What is the value of Bichiery to Tazza?

(c) What is the cost to Tazza of the share offer?

(d) What is the NPV to Tazza of each alternative?

(e) What alternative should Tazza use?