Problem 29-14 Merger NPV Fly-By-Night Couriers is analyzing the possible acquisi
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Question
Problem 29-14 Merger NPV
Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants. Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would increase its annual aftertax cash flow by $380,000 indefinitely. The current market value of Flash-in-the-Pan is $10 million. The current market value of Fly-By-Night is $24 million. The appropriate discount rate for the incremental cash flows is 10 percent. Fly-By-Night is trying to decide whether it would offer 35 percent of its stock or $13 million in cash to Flash-in-the-Pan.
What is the synergy from the merger? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
What is the value of Flash-in-the-Pan to Fly-By-Night? (Do not round intermediate calculations.Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
What is the cost to Fly-By-Night of each alternative? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, i.e. 1,234,567.)
What is the NPV to Fly-By-Night of each alternative? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, i.e. 1,234,567.)
What alternative should Fly-By-Night use?
Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants. Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would increase its annual aftertax cash flow by $380,000 indefinitely. The current market value of Flash-in-the-Pan is $10 million. The current market value of Fly-By-Night is $24 million. The appropriate discount rate for the incremental cash flows is 10 percent. Fly-By-Night is trying to decide whether it would offer 35 percent of its stock or $13 million in cash to Flash-in-the-Pan.
Explanation / Answer
Hi there,
A) The synergy will be the present value of the incremental cash flows of the proposed purchase. Since the cash flows are perpetual, the synergy value is = 380,000/0.08 = 4,750,000
B)The value of Flash-in-the-Pan to Fly-by-Night is the synergy plus the current market value of Flash-in-the-Pan
Value = 475,000 + 10,000,000 = 14,750,000
C)The value of the cash option is the amount of cash paid, or 25 million. The value of the stock acquisition is the percentage of ownership in the merged company, times the value of the merged company, so:
Stock Acquisition Value = 0.35*(14,750,000+24,000,000) = 13,562,500
Cash Acquisition - 13,000,000
D)The NPV is the value of the acquisition minus the cost, so the NPV of each alternative is:
NPV of cash = 14,750,000 - 13,000,000 = 1,750,000
NPV of stock = 14750000 - 13,562,500 = 1,187,500
E) The acquirer should make the cash offer since its NPV is greater.
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Cheers!!!
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