1. What is the synergy from the merger? 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 600,000/.08=7,500,000 2. What is the value of Flash-in-the-Pan to Fly-By-Night? The value of Flash-in-the-Pan to Fly-by-Night is the synergy plus the current market value of Flash-in-the-Pan. Value = 7,500,000+20,000,000=27,500,000 Fly-By-Night is trying to decide whether it should offer 25 percent of its stock or $15 million in cash to Flash-in-the-Pan. 3. What is the cost to Fly-By-Night of each alternative? The value of each alternative is: Cash alternative = 15,000,000 ( the amount offered) Stock alternative = 25% of the total value of Fly By Night after acquistion, the total value is 35,000,000+27,500,000 Cost = 0.25 X (35,000,000+27,500,000) = 15,625,000 4. What is the NPV to Fly-By-Night of each alternative? Since these values are already in PV terms, the NPVs are simply Value - Cost: NPV of cash = 27,500,000-15,000,000=12,500,000 NPV of stock = 27,500,000-15,625,000=11,875,000
5. Which alternative should Fly-By-Night use? Use the cash alternative, because its NPV is greater.
