Merger NPV Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-

Pan Restaurants. Neither fi rm has debt. The forecasts of Fly-By-Night show that the purchases would increase its annual aftertax cash fl ow by $600,000 indefi nitely. The current market value of Flash-in-the-Pan is $20 million. The current market value of Fly-By-Night is $35 million.

The appropriate discount rate for the incremental cash fl ows is 8 percent. Fly-By-Night is trying to decide whether it would offer 25 percent of its stock or $25 million in cash to Flashin-

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?

 LO.1