Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan
ID: 2762206 • 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 $360,000 indefinitely. The current market value of Flash-in-the-Pan is $7 million. The current market value of Fly-By-Night is $22 million. The appropriate discount rate for the incremental cash flows is 6 percent. Fly-By-Night is trying to decide whether it should offer 35 percent of its stock or $12 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 $360,000 indefinitely. The current market value of Flash-in-the-Pan is $7 million. The current market value of Fly-By-Night is $22 million. The appropriate discount rate for the incremental cash flows is 6 percent. Fly-By-Night is trying to decide whether it should offer 35 percent of its stock or $12 million in cash to Flash-in-the-Pan.
Explanation / Answer
What is the synergy from the merger?
=360,000 /.06 =$6000000
What is the value of Flash-in-the-Pan to Fly-By-Night?.
synergy plus the current market value of Flash-in-the-Pan
V= $6,000,000+ $7,000,000=13,000,000
What is the cost to Fly-By-Night of each alternative?
Cash alternative = $12,000,000 – 7,000,000 =$5,000,000
Stock alternative = 0.35 × ($13,000,000 + 22,000,000)–7,000,000=5,250,000
What is the NPV to Fly-By-Night of each alternative?
NPV of cash alternative = 6,000,000 – 5,000,000 = $1,000,000
NPV of stock alternative =6,000,000 – 5,250,000 = $750,000
Use the cash alternative because its NPV is greater