Example: Banana shipping Banana Shipping is analyzing the possible acquisition of Superb Logistics. Neither firm has debt. The forecasts of Banana Shipping show that the purchase would increase its annual after-tax cash flow by $380,000 (above the level of the cash flows of the two companies pre-merger), indefinitely. The current market value of Superb Logistics is $7.5 million. The current market value of Banana Shipping is $31 million. The appropriate discount rate for the incremental cash flows is 8 percent. Banana Shipping is trying to decide whether it will offer 25 percent of its stock or $11.5 million in cash to Superb Logistics shareholders.

What is the synergy from the merger?

What is the premium paid to the shareholders of Superb Logistics under each alternative?

Which means of payment, shares or cash, should Banana Shipping use to maximize its NPV from the deal?

If Superb Logistics shareholders would ask for $13 million in cash, could there be any reasons for the management of Banana Shipping still to acquire the company? Please, explain.