Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in- the-Pan Restaurants. Neither firm has debt. The forecasts

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 after tax cash flow by $425,000 indefinitely. The current market value of Flash-in-the-Pan is $7.3 million. The current market value of Fly-

By-Night is $24 million. The appropriate discount rate for the incremental cash flows is 8 percent. Fly-By-Night is trying to decide whether it would offer 30 percent of its stock or $11.4 million in cash to Flash-in-the-Pan.

a. What is the synergy from the merger?

b. What is the value of Flash-in-the-Pan to Fly-By-Night?

c. What is the cost to Fly-By-Night of each alternative?

d. What is the NPV to Fly-By-Night of each alternative?

e. What alternative should Fly-By-Night use?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...