Chapter 29:

Questions and Problems 7: Cosh versus Stock Payment

Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total after-tax annual cash flow by $1.1 million indefinitely. The current market value of Teller is $45 million, and that of Penn is $62 million. The appropriate discount rate for the incremental cash flows is 12 percent. Penn is trying to decide whether it should offer 40 percent of its stock or $48 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?

Questions and Problems 8: EPS, PE, and Mergers

The shareholders of Flannery Company have voted in favor of a buyout offer from Stult Corporation. Information about each firm is given here:

Flannery's shareholders will receive one share of Stultz stock for every three shares they hold in Flannery.

a. What will the EPS of Stultz be after the merger? What will the PE ratio be if the NPV of the acquisition is zero?

b. What must Stultz feel is the value of the synergy between these two firms? Explain how your answer can be reconciled with the decision to go ahead with the takeover.