Using the following information to answer questions 27-28: Penn Corp. is analyzi
ID: 2744227 • Letter: U
Question
Using the following information to answer questions 27-28:
Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn belives the acquisition will increase its total aftertax annual cash flow by $1.3 million indefinitely. The current market value of Teller is $27 million, and that of Penn is $62 million. The appropriate discount rate for the incremental cash flow is 11 percent. Penn is trying to decide whether it should offer 35 percent of its stock or $37 million in cash to Teller's shareholders.
What is the NPV of Stock Offer?
$3,531,818
$3,478,212
$3,728,414
$3,812,412
What is the NPV of cash offer?
$2,218,231
$1,324,768
$2,970,176
$1,818,182
A.$3,531,818
B.$3,478,212
C.$3,728,414
D.$3,812,412
Explanation / Answer
Answer
Answer 1
NPV of stock offer = Benefit - Cost
= ($1.3 million / 0.11) – [ {$62 million + $27 million + ( $1.3 million / 0.11)} *0.35 - $27 million ]
= 11.81818181 million - [{$62 million + $27 million +11.81818181 million} *0.35 - $27 million]
= 11.81818181 million - [{100.81818181 million} *0.35 - $27 million]
= 11.81818181 million - [35.28636363 million - $27 million]
= 11.81818182 million - 8.28636364 million
= $ 3,531,818
Answer : The NPV of Stock Offer is : A. $3,531,818
Answer 2
NPV of cash offer = Benefit – Cost
= ($1.3 million / 0.11) – [$37 million - $27 million]
= 11.81818182 million - $ 10 million
= $ 1,818,182
Answer : the NPV of cash offer is : D. $1,818,182
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