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Merger and Acquisition

Fly-by-night Couriers is analyzing the possible acquisition of Flash-in the pan Restaraunts. Neither firm has debt. The forecasts of Fly-by-night show that the purchase would increase its annual after-tax cash-flow by $600,000 indefinately. The current market value of Flash-in -the-Pan is $20 million. The current market value of Fly-by-night is $35 million. The appropriate discount rate for the incremental cash flows is 8 percent.

a. What is the synergy from the merger?
b. What is the value of Flash-in-the-pan to Fly-by-Night?
Fly-by-night is trying to decide whether it should offer 25 percent of its stock or $15 million in cash to Flash-in-the-Pan.
c. What is the cost to Fly-by-Night of each alternative?
d. What is the NPV to Fly-by-night of each alternative?
e. Which alternative should Fly-by-Night use?

Solution Preview

Fly-by-night Couriers is analyzing the possible acquisition of Flash-in the pan Restaraunts. Neither firm has debt. The forecasts of Fly-by-night show that the purchase would increase its annual after-tax cash-flow by $600,000 indefinately. The current market value of Flash-in -the-Pan is $20 million. The current market value of Fly-by-night is $35 million. The appropriate discount rate for the incremental cash flows is 8 percent.

a. What is the synergy from the merger?

Increase in cash flow= $600,000 in perpetuity
Discount ...

Solution Summary

The solution calculates the value of a firm that is to be acquired, synergy from the merger, cost of stock offer and cash offer and NPV of alternatives.

$2.19