Baking Inc. and Sweet Co. are all-equity firms. Baking Inc. has 97,500 shares of stock outstanding at a price of $40 a share. Sweet Co. has 64500 shares of stock outstanding at a price of $29 a share. Baking Inc. is analyzing the possible acquisition of Sweet Co. Baking Inc. believes the acquisition will increase its total after-tax annual cash flow by $75500 indefinitely. The appropriate discount rate for incremental cash flows is 20 percent.

a) Baking Inc. is acquiring Sweet Co. for $2,030,000 in cash. What is the NPV of the acquisition? What is the new share price of the merged firm after the acquisition?

b. Suppose stock consideration is used (Baking Inc. offers to pay Sweet Co. in stock). Sweet Co. is acquired for the $2,000,000 value of Baking’s stock. What is the new share price of the merged firm after the acquisition? What is the NPV of the acquisition? Should Baking Inc. pay in cash or stock?