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 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 incremental cash flows is 10 percent. Penn is trying to decide whether it should offer 40 percent of it's stock or 57 million in cash to teller's shareholder.

a) What is the cost of the alternative?

b) What is the NPV of each alternative?

Which alternative should Penn choose?