Fly-by-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants.Neither firm has any debt.The forecasts by Fly-by-Night show that the purchase would increase total annual after-tax cash flows by $600,000 indefinitely from cost savings.The current market value of Flash-in-the-Pan is $10 million.The current market value of Fly-by-Night is $35 million.The appropriate discount rate for any change in cash flows from the merger is 8 percent.

(a)What is the total value of the synergy gain from this merger?

(b)What is the most that Fly-by-Night would be willing to pay for Flash-in-the-Pan?

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

(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)Which of these alternatives will Fly-by-Night prefer?