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Fly-by-Night Couriers is analysing 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
Fly-by-Night Couriers is analysing 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 $390,000 indefinitely. The current market value of the Flash-in-the-Pan is $7 million. The current market value of Fly-by-Night is $22 million. The appropriate discount rate for the incremental cash flows is 8 percent. Fly-by-Night is trying to decide whether it would offer 30 percent of its stock or $9 million in cash to Flash-in-the-Pan. (a) What is the synergy from the merger? (b) What is the value of Flash-in-the-Pan to Fly-by-Night? (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) What alternative should Fly-by-Night choose
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