Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan
ID: 2647302 • Letter: F
Question
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 after tax cash flow by $320,000 indefinitely. The current market value of Flash-in-the-Pan is $6 million. The current market value of Fly-By-Night is $17 million. The appropriate discount rate for the incremental cash flows is 8 percent. Fly-By-Night is trying to decide whether it should offer 35 percent of its stock or $9 million in cash to Flash-in-the-Pan. a. What is the synergy from the merger? b. What is the value of Flash-in-the-Pan to Fly-By-Night? c. What is the cost to Fly-By-Night of each alternative? d. What is the NPV to Fly-By-Night of each alternative? e. Which alternative should Fly-By-Night use?Explanation / Answer
a) Synergy from merger
Increase in annual after tax cash flow by $ 320,000 indefinitely. The appropriate discount rate for incremental cash flows is 8 percent.
a) Synergy from merger = Annual after tax perpetual cash flow/ discount rate
= $ 320,000/8%
= $ 4,000,000
b) Value of flash-in-the-pan to fly by night
1. Total Mkt. value of flash in the pan restaurant = $ 6,000,000
2. Total Mkt. value of fly by night currier = $ 17,000,000
3. Synergy from merger = $ 4,000,000
Total value of fly by night currier post merger (1+2+3) = $ 27,000,000
Pre merger
Value of flash-in-the-pan to fly by night = $ 6,000,000
Post merger
If stock is given
value of flash-in-the-pan to fly by night = (0.35 *27,000,000) = $ 9,450,000
If cash is given
value of flash-in-the-pan to fly by night = $ 9,000,000
C) Cost to Fly by night couriers
1) Cost of cash = $ 9,000,000
2) Cost of stock = (0.35 *27,000,000) = $ 9,450,000
D) NPV to Fly by night
1. Total value of flash in the pan restaurant = $ 6,000,000
2. Synergy from merger = $ 4,000,000
Total value received of fly by night currier = $ 10,000,000
1) NPV cash = Value received