Eastman Corp. is analyzing the possible acquisition of Kodiak Company. Both firms have no debt. Eastman believes the acquisition will increase its total aftertax annual cash flows by $2.6 million indefinitely. The current market value of Kodiak is $102 million, and that of Eastman is $140 million. The appropriate discount rate for the incremental cash flows is 12 percent. Eastman is trying to decide whether it should offer 40 percent of its stock or $110 million in cash to Kodiak’s shareholders.

a. What is the cost of each alternative?

b. What is the NPV of each alternative?

c. Which alternative should Eastman choose?