Hunter Corp. is considering acquiring Prey Inc. Neither corporation has any debt. Hunter Corp. expects the acquisition of Prey Inc. will generate synergy equal to $1 million per year in after-tax cash flow, indefinitely (a perpetuity, see pages 185 and 186 of the textbook if you need a refresher). Hunter Corp.'s current market value is $70 million. Prey Inc.'s current market value is $30 million. The appropriate discount rate, based on the risk of Prey Inc., is 10%. Hunter Corp. needs to decide between offering 35% of its stock or $37 million in cash to Prey Inc.'s shareholders.

a. What is the value of the target to the acquirer?

b. What is the cost of the stock offer?

c. What is the cost of the cash offer?

d. What are the NPVs of the stock offer and of the cash offer to the shareholders of Hunter?

e. Which alternative should Hunter Corp. pursue? Why?