Justice bank is analyzing the possible acquisition of Fair insurance. Neither firm has debt. The forecasts of Justice show that the purchase would increase its annual aftertax cash flow by $445,000 indefinitely. The current market value of Fair is $7.8 million. The current market value of Justice is $29 million. The appropriate discount rate for the incremental cash flows is 8%. Justice is trying to decide whether it would offer 25% of its stock or $11.4 million in cash to Fair.

a. What is the synergy from the merger?

b. What is the value of Fair to Justice?

c. What is the cost to Justice of each alternative?

d. What is the NPV to Justice of each alternative?

e. What alternative should Justice use?