Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan
ID: 2753888 • 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 $450,000 indefinitely. The current market value of Flash-in-the-Pan is $14 million. The current market value of Fly-by-Night is $31 million. The appropriate discount rate for the incremental cash flows is 8 percent. Fly-by-Night is trying to decided whether it should offer 35 percent of its stock or $18.5 million in cash to Flash-in-the-Pan. What is the synergy from the merger? Round to the nearest dollar.
Explanation / Answer
The synergy will be the present value of the incremental cash flows of the proposed purchase.Since the cash flows are perpetual, this amount is
Incremental Cash Flow/Discounted rate
$637,104/0.072
$8848667