Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the

Question

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 $1 million indefinitely. The current market value of Teller is $40 million, and that of Penn is $85 million. The appropriate discount rate for the incremental cash flows is 10 percent. Penn is trying to decide whether it should offer 35 percent of its stock or $48 million in cash to Teller's shareholders. a.What is the cost of each alternative? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567.)b.What is the NPV of each alternative? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567.) cost of cash? cost of stock? npv of cash? npv of stock?

Help In Homework · Accepted Answer

a. Computation of Cost of Each Alternative: Cost of Cash: Cost of Cash = Cost of Cash considered as Amount of Cash. So Cost of Cash is $48,000,000. Cost of Stock: Cost of Stock = 35%*(Market Value of Penn Corp. + Value of Teller Company for to P Corporation) = 35%*($85,000,000 + ($1,000,000/10%+$40,000,000) = 35%*($85,000,000+$50,000,000) = 35%*$135,000,000 Cost of Stock = $47,250,000 b. Computation of NPV of Each Alternative: NPV of Cash: NPV of Cash = Value of Teller Company for to P Corporation - Cost of Cash = $50,000,000 - $48,000,000 NPV of Cash = $2,000,000 NPV of Stock: NPV of Stock = Value of Teller Company for to P Corporation - Cost of Stock = $50,000,000 - $47,250,000 NPV of Stock = $2,750,000 As NPV of Stock is higher than Cash. So, Penn Corp. should choose stock.

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