Fly-By-Night Couriers is analyzing 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 $600,000 indefinitely. The current market value of Flash-in-the-Pan is $20 million. The current market value of Fly-By-Night is $35 million. The appropriate cost of capital for the incremental cash flows is 8 percent.

1. What is the synergy form the merger?

2. What is the GAIN from the merger?

Fly-By-Night is trying to decide whether it should offer 25 percent of its stock OR $15 million in cash to Flash-in-the-Pan.

3. What is the cost to Fly-By-Night of each alternative?

4. What is the NPV to Fly-By-Night of each alternative?

5. Which alternative should Fly-By-Night use?

6. Which alternative should Fly-By-Night use?