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 $2 million indefinitely. The current market value of Teller is $41 million, and that of Penn is $86 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 $59 million in cash to Teller's shareholders. |
a. | What is the cost of each alternative? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.) |
Cash cost | $ |
Equity cost | $ |
b. | What is the NPV of each alternative? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.) |
NPV cash | $ |
NPV stock | $ |
c. | Which alternative should Penn choose? | ||||
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Fundamentals Of Corporate Finance
ISBN: 9781265553609
13th Edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan