Kelley Inc.s board of directors has agreed to acquire Dumont Co. Both firms have no debt. Kelley believes that the acquisition will increase its total after-tax annual cash flow by $2.0 Million indefinitely. The current market value of Kelley is $80 Million, and that of Dumont is $35 Million. The appropriate discount rate for the incremental cash flows is 8%. Kelleys board is trying to decide if they should offer 30% of its stock or $50 Million in cash to Dumonts shareholders. What would be your recommendation to the board? Compute the requested analysis figures below to justify your answer.

PART A

NPV to Acquirer =

(with cash offer)

NPV to Acquirer =

(with stock offer)

Recommendation: Circle One

Cash OR Stock

PART B

What (% of stock offer) would make Kelley indifferent between choosing cash or stock as the consideration?

=

PART C

What rate is appropriate for discounting the incremental cash flows? (i.e., in words, what does the 8% above represent or what is it called?)