1. Tasty Burgers is analyzing the possible acquisition of Cheesy Pizzas. Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would increase its annual aftertax cash flow by $390,000 indefinitely. The current market value of Cheesy Pizzas is $7 million. The current market value of Tasty Burgers is $22 million. The appropriate discount rate for the incremental cash flows is 8 percent. Tasty Burgers is trying to decide whether it would offer 25 percent of its stock or $10 million in cash to Cheesy Pizzas.

a. What is the synergy from the merger?

b. What is the value of Cheesy Pizzas to Tasty Burgers?

c. What is the cost to Tasty Burgers of each alternative?

d. What is the NPV to Tasty Burgers of each alternative?

e. What alternative should Tasty Burgers use?