Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total after-tax annual cash flows by $3.1 million indefinitely. The current market value of Teller is $78 million, and that of Penn is $135 million. The appropriate discount rate for the incremental cash flows is 12 percent. Penn is trying to decide whether it should offer 40 percent of its stock or $94 million in cash to Tellers shareholders.

a. What is the cost of each alternative?

b. What is the NPV of each alternative?

c. Which alternative should Penn choose?