FREE Trial

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

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 $1.6 million indefinitely. The current market value of Teller is $38 million, and that of Penn is $65 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 $51.5 million in cash to Teller’s shareholders.

a. What is the cost of each alternative?

b. What is the NPV of each alternative?

c. Which alternative should Penn choose?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Answer rating: 64% (14 reviews)

a The cash cost is the amount of cash offered so the cash cost is 515 million To calculate the cos...View the full answer


answer-question
Answered By
tutor-profile-image
OTIENO OBADO
I have a vast experience in teaching, mentoring and tutoring. I handle student concerns diligently and my academic background is undeniably aesthetic
4.30+ 3+ Reviews 10+ Question Solved
Related Book For  answer-question
Fundamentals of Corporate Finance

Fundamentals of Corporate Finance

ISBN: 978-1260153590

12th edition

Authors: Stephen M. Ross, Randolph W Westerfield, Robert R. Dockson, Bradford D Jordan

See More Books
Question Posted:
See More Questions

Related Video

NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

Students also viewed these Business questions

Summary The Crowdfunding Revolution Review And Analysis Of Lawton And Maroms Book 1st Edition - ISBN: 2511047764 - Free Book