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Mergers and Acquisitions

Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants. 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 indefinitely. 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.

1. What is the synergy from the merger?
2. 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.
3. What is the cost to Fly-By-Night of each alternative?
4. What is the NPV to Fly-By-Night of each alternative?
5. Which alternative should Fly-By-Night use?

Solution Preview

1. What is the synergy from the merger?

The synergy will be the present value of the incremental cash flows of the proposed purchase. Since the cash flows are perpetual, this amount is 600,000/.08=7,500,000

2. What is the value of Flash-in-the-Pan to Fly-By-Night?

The value of Flash-in-the-Pan ...

Solution Summary

The solution explains the calculations relating to mergers and acquisitions.

$2.19