3. 12.

Merger NPV [LO 26.3] Fly-By-Night Couriers is analysing 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 $375 000 indefinitely. The current market value of Flash-in-the-Pan is $8.7 million. The current market value of Fly-By-Night is $21 million. The appropriate discount rate for the incremental cash flows is 8 per cent. Fly-By-Night is trying to decide whether it should offer 35 per cent of its shares or $12 million in cash to Flash-in-the-Pan.

1. What is the synergy from the merger?

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

3. What is the cost to Fly-By-Night of each alternative? 4. What is the NPV to Fly-By-Night of each alternative?

5. Which alternative should Fly-By-Night use?