Eastman Corp. is analyzing the possible acquisition of Kodiak Company. Both firms have no debt. Eastman believes the acquisition will increase its total aftertax annual cash flows by \($1.3\) million indefinitely. The current market value of Kodiak is \($51\) million, and that of Eastman is \($70\) million. The appropriate discount rate for the incremental cash flows is 12 percent. Eastman is trying to decide whether it should offer 40 percent of its stock or \($55\) million in cash to Kodiak’s shareholders.

a. What is the cost of each alternative?

b. What is the NPV of each alternative?

c. Which alternative should Eastman choose?