1. 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 aftertax cash flow by $370,000 indefinitely. The current market value of Flash-in-the-Pan is $9 million. The current market value of Fly-By-Night is $23 million. The appropriate discount rate for the incremental cash flows is 8 percent. Fly-By-Night is trying to decide whether it would offer 35 percent of its stock or $13 million in cash to Flash-in-the-Pan.

a. What is the synergy from the merger? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

Synergy value $

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

Value $

c. What is the cost to Fly-By-Night of each alternative? (Do not round intermediate calculations.

Cost of cash $

Cost of stock $

d. What is the NPV to Fly-By-Night of each alternative? (Do not round intermediate calculations.

NPV of cash $

NPV of stock $

e. What alternative should Fly-By-Night use?

Stock offer

Cash offer

2. 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 flow by $2 million indefinitely. The current market value of Teller is $51 million, and that of Penn is $76 million. The appropriate discount rate for the incremental cash flows is 10 percent. Penn is trying to decide whether it should offer 45 percent of its stock or $66 million in cash to Teller's shareholders.

a. What is the cost of each alternative? (Do not round intermediate calculations.

Cash cost $

Equity cost $

b. What is the NPV of each alternative?

NPV cash $

NPV stock $

c. Which alternative should Penn choose?

Cash

Stock

3. Assume that both firms have no debt outstanding.

Firm B Firm T

Shares outstanding 6,400 2,300

Price per share $ 48 $ 20

Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $9,800. Firm T can be acquired for $22 per share in cash or by exchange of stock wherein B offers one of its share for every two of T's share.

Are the shareholders of Firm T better off with the cash offer or the stock offer?

Share offer is better

Cash offer is better

At what exchange ratio of B shares to T shares would the shareholders in T be indifferent between the two offers?

4. Fair-to-Midland Manufacturing, Inc., (FMM) has applied for a loan at True Credit Bank. Jon Fulkerson, the credit analyst at the bank, has gathered the following information from the company's financial statements:

Total assets $109,000

EBIT 8,600

Net working capital 5,100

Book value of equity 36,000

Accumulated retained earnings 18,500

Sales 109,000

The stock price of FMM is $38 per share and there are 6,700 shares outstanding. What is the Z-score for this company?

5. Assume that the following balance sheets are stated at book value.

Jurion Co.

Current assets $ 20,000 Current liabilities $ 5,300

Net fixed assets 33,200 Long-term debt 9,500

Equity 38,400

Total $ 53,200 Total $ 53,200

James, Inc.

Current assets $ 3,900 Current liabilities $ 2,300

Net fixed assets 9,100 Long-term debt 1,600

Equity 9,100

Total $ 13,000 Total $ 13,000

Suppose the fair market value of James's fixed assets is $15,200 versus the $9,100 book value shown. Jurion pays $24,000 for James and raises the needed funds through an issue of long-term debt. Construct the postmerger balance sheet assuming that the purchase method of accounting is used. (Do not round intermediate calculations.)

Jurion Co., post-merger

Current assets $ Current liabilities $

Fixed assets Long-term debt

Goodwill Equity

Total $ Total $

6. Bentley Corp. and Rolls Manufacturing are considering a merger. The possible states of the economy and each company's value in that state are shown here:

State Probability Bentley Rolls

Boom .70 $ 330,000 $ 300,000

Recession .30 $ 130,000 $ 100,000

Bentley currently has a bond issue outstanding with a face value of $145,000. Rolls is an all-equity company.

a. What is the value of each company before the merger? (Do not round intermediate calculations.)

Value of Bentley $

Value of Rolls $

b. What are the values of each company's debt and equity before the merger? (Leave no cells blank - be certain to enter "0" wherever required.

Equity of Rolls $