Light company is planning to acquiring Mountain company. Both firms have no debt. Light company believes the acquisition will increase its total after-tax annual cash flows by $2 million indefinitely. The current market value of Mountain company is $60 million, and the market value of Light company is $ 120 million. The appropriate discount rate for the incremental cash flow is 8%. Light is trying to decide whether it should offer 35% of its stock or $70 million in cash to Mountains shareholders.

a. What is the purchase price of each alternative?

b. What is the NPV of each alternative? Which alternative should Light choose, why?