Answer to Question #325373 in Finance for miki

Question

1. Yummy Burgers is analyzing the possible acquisition of Apple Pizzas. Neither firm has debt. The forecasts of Yummy Burgers show that the purchase would increase its annual aftertax cash flow by $390,000 indefinitely. The current market value of Apple Pizzas is $8 million. The current market value of Yummy Burgers is $22 million. The appropriate discount rate for the incremental cash flows is 8 percent. Yummy Burgers is trying to decide whether it would offer 25 percent of its stock or $10 million in cash to Apple Pizzas.

a. What is the synergy from the merger?

b. What is the value of Apple Pizzas to Yummy Burgers?

c. What is the cost to Yummy Burgers of each alternative?

d. What is the NPV to Yummy Burgers of each alternative?

e. What alternative should Yummy Burgers use?

Answer 1

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