Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan
ID: 2818045 • 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 $340,000 indefinitely. The current market value of Flash-in-the-Pan is $9 million. The current market value of Fly-By-Night is $19 million. The appropriate discount rate for the incremental cash flows is 8 percent. Fly-By-Night is trying to decide whether it should offer 40 percent of its stock or $13 million in cash to Flash-in-the-Pan.
a. What is the synergy from the merger? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
Synergy value $
b. What is the value of Flash-in-the-Pan to Fly-By-Night? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
Value $
c. What is the cost to Fly-By-Night of each alternative? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, e.g., 1,234,567.)
Cost of cash $
Cost of stock $
d. What is the NPV to Fly-By-Night of each alternative? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, e.g., 1,234,567.)
NPV cash $
NPV stock $
e. Which alternative should Fly-By-Night use?
Stock offer
Cash offer
Explanation / Answer
Market Price of Fly by Night $19*Million Purchase of Flash in the Pan Increase After tax cash Flow by $3,40,000 Market Price of Flash in the Pan $9*Million Disount Factor 8% Sale at 40% of Stock or $13 Million in cash a) Synergy From Merger Synergy is Present Value of Incremental Cash Flows of the Proposed Purchase. Synergy from Merger = Incremental Cash Flow From Purchase/Discount Rate $340000/0.08 $ 42,50,000 b) Value of Flash in the Pan to Fly By Night = Synergy Plus the Market Value of Flash in the Pan $ 42,50,000 +$90,00,000 $1,32,50,000 c) Cost to Fly by Night for Each alternative Cash Alternative $13000000-$9000000 $ 4000000 Stock Alternative 0.4*($13250000+$19000000)-$9000000 $ 3900000 d) NPV to Fly by Night NPV Cash $ 42,50,000-$40,00,000 $ 250000 NPV Stock $ 42,50,000-$39,00,000 $ 350000 e) NPV of Stock is Higher ,therefore Stock Alternative should be used $350000