Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan
ID: 2793060 • 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 $320,000 indefinitely. The current market value of Flash-in-the-Pan is $9 million. The current market value of Fly-By-Night is $22 million. The appropriate discount rate for the incremental cash flows is 8 percent. Fly-By-Night is trying to decide whether it would 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, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
What is the value of Flash-in-the-Pan to Fly-By-Night? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
What is the cost to Fly-By-Night of each alternative? (Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)
What is the NPV to Fly-By-Night of each alternative? (Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)
What 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 $320,000 indefinitely. The current market value of Flash-in-the-Pan is $9 million. The current market value of Fly-By-Night is $22 million. The appropriate discount rate for the incremental cash flows is 8 percent. Fly-By-Night is trying to decide whether it would offer 35 percent of its stock or $12 million in cash to Flash-in-the-Pan.
Explanation / Answer
a)
Synergy from the merger= IncrementalCash flows/ Discount rate = 320,000/0.08 = $ 4 ,000,000
b)
Value of flash in the pan to fly by night = 4,000,000 + 9,000,000= $ 13,000,000
c)
Cost of Cash alternative = 12,000,000- 9,000,000 = $ 3,000,000 (since cash less flash in the Pan)
Stock Alternative Cost = 0.35 * (13,000,000+ 22,000,000) -9,000,000 = $ 3,250,000
d)
NPV of cash alternative= 4,000,000-3,000,000= $ 1,000,000
NPV of Stock alternative = 4,000,000 - 3,250,000 = $ 750,000
e)
Use Cash alternative as NPV is larger.