30.10 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 $600,000 indefinitely. 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 flows is 8 percent.

a. What is the synergy from the merger?

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

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. Which alternative should Fly-By-Night use?
30.11 Freeport Manufacturing is considering making an offer to purchase Portland Industries.
The treasurer of Freeport has collected the following information:

The treasurer also knows that securities analysts expect the earnings and dividends (currently $1.80 per share) of Portland to grow at a constant rate of 5 percent each year.
Her research indicates, however, that the acquisition would provide Portland with some economies of scale that would improve this growth rate to 7 percent per year.

a. What is the value of Portland to Freeport?

b. If Freeport offers $40 in cash for each outstanding share of Portland, what would the NPV of the acquisition be?

c. If instead Freeport were to offer 600,000 of its shares in exchange for the outstanding stock of Portland, what would the NPV of the acquisition be?

d. Should the acquisition be attempted, and if so, should it be a cash or stock offer?

e. Freeport’s management thinks that 7-percent growth is too optimistic and that 6 percent is more realistic. How does this change your previous answers?

Transcribed Image Text:

Price-earnings ratio Number of shares Earnings Freeport 15 1,000,000 $1,000,000 Portland 12 250,000 $750,000