Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total aftertax annual cash flows by $1.9 million indefinitely. The current market value of Teller is $41 million, and that of Penn is $79 million. The appropriate discount rate for the incremental cash flows is 10 percent. Penn is trying to decide whether it should offer 40 percent of its stock or $57 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?