Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan
ID: 2718394 • 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 aftertax cash flow by $380,000 indefinitely. The current market value of Flash-in-the-Pan is $8 million. The current market value of Fly-By-Night is $28 million. The appropriate discount rate for the incremental cash flows is 8 percent. Fly-By-Night is trying to decide whether it should offer 30 percent of its stock or $11 million in cash to Flash-in-the-Pan.
What is the synergy from the merger? (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? (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? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
What is the NPV to Fly-By-Night of each alternative?
Which 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 $8 million. The current market value of Fly-By-Night is $28 million. The appropriate discount rate for the incremental cash flows is 8 percent. Fly-By-Night is trying to decide whether it should offer 30 percent of its stock or $11 million in cash to Flash-in-the-Pan.
Explanation / Answer
(a) Synergy form the merger = Present value of incremental cash flows = $380,000 / 0.08 = $4,750,000
(b) Value of Flash-in-the-Pan to Fly-by-night = Value of flash-in-the-pan + Gain from merger = $8,000,000 + $4,750,000 = $12,750,000
(c)
Cost of cash alternative = Cash paid – value of Flash-in-the-pan = $11,000,000 - $8,000,000 = $3,000,000
Cost of stock alternative = 30% of merged firm – Value of flash-in-the-pan
Value of merged firm = Value of Fly-by-night + Value of flash-in-the-pan + Gain from merger
= $28,000,000 + $8,000,000 + $4,750,000 = $40,750,000
Cost of stock alternative = ($40,750,000 *0.30) - $8,000,000 = $4,225,000
(d)
NPV of cash alternative = Gain from merger – Cost of cash alternative = $4,750,000 - $3,000,000 = $1,750,000
NPV of stock alternative = Gain from merger – Cost of stock alternative = $4,750,000 - $4,225,000 = $525,000
(e)
Fly-by-night should use cash offer alternative because NPV of cash offer is more.