Penn Corp. is analyzing the possible acquisition of Teller Company. Neither firm has debt. The forecasts of Penn Corp. show that the purchase would increase its annual aftertax cash flow by $425,000 indefinitely. The current market value of Teller Company is $7.3m. The current market value of Penn Corp. is $24m. The appropriate discount rate for the incremental cash flows is 8 percent. Penn Corp. is trying to decide whether it would offer 30 percent of its stock or $11.4m in cash to Teller Company.

(a) What is the synergy from the merger? (b) What is the value of Teller Company to Penn Corp.?

(c) What is the cost to Penn Corp. of each alternative? (d) What is the NPV to Penn Corp. of each alternative?

(e) Which alternative should Penn Corp. choose?