Cash versus Stock Payment [LO3] Penn Corp. is analyzing the possible acquisition
ID: 2647359 • Letter: C
Question
Cash versus Stock Payment [LO3] 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 $2 million indefinitely. The current market value of Teller is $43 million, and that of Penn is $89 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 $61 million in cash to Teller's shareholders.
What is the cost of each alternative?
What is the NPV of each alternative?
Which alternative should Penn choose?
Explanation / Answer
Gain on Acquistion = 2 Million /10% = $ 20 Million
What is the cost of each alternative?
Alternative 1 (40% of its Stock)
Total Market value of Penn after acquistion = 43 + 89 + 20 = $ 152 Million
Offer Value to Teller = 152*40% = 60.80 million
Cost = 60.80 - 43
Cost = $ 17.80 Million
Alternative 2 ($ 61 Million in cash)
Offer Value to Teller = 61 million
Cost = 61 - 43
Cost = $ 18 Million
What is the NPV of each alternative?
Alternative 1 (40% of its Stock)
NPV to Penn = Gain - Cost
NPV to Penn = 20 - 17.80
NPV to Penn = $ 2.20 Million
Alternative 2 ($ 61 Million in cash)
NPV to Penn = Gain - Cost
NPV to Penn = 20 - 18
NPV to Penn = $ 2 Million
Which alternative should Penn choose?
Penn should choose alternative 1 i.e 40 percent of its stock
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.