Buffalo is analyzing the possible acquisition of Tiger. Buffalos market value is $3,000,000 and its market price per share is $40. Tigers market value is $800,000. Buffalo estimates the incremental value after purchasing Tiger is $250,000 and the total purchase price would be $1,000,000.

a) If cash is used, what is the NPV of the proposed acquisition?

b) What is the NPV if stock is used? Assume that the number of shares paid is based

on pre-merger price.

c) Why is the NPV for a cash-financed merger greater than if stock is employed? How much more cash could be offered if the NPV for a cash-financed deal just equaled the NPV for the stock-financed deal?