Problem 1-1

Alpha Corp is analyzing the possible acquisition of Beta Corp. Both Alpha and Beta are all-equity financed. The manager of Alpha believes that the merger will create an after-tax synergy of $0.6 million per year in perpetuity and the appropriate discount rate is 8%. Currently, the market value of Alpha is $35 million, while the market value of Beta is $20 million. Alpha is considering two alternative methods of payment: 1) $25 million in a cash-for-stock offer or 2) 40% of its stock in a stock-for-stock offer. Which alternative should be pursued by Alpha?