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Nike Corporation is analysing the possible acquisition of Adidas Corporation. There are two alternatives for Nike: 1) to use cash or 2) stock as payment. Both firms have no debt. Nike believes the acquisition will increase its total after-tax annual cash flow by €1.3 million indefinitely. The current market value of Adidas is €27 million, and that of Nike is €62 million. The appropriate discount rate for the incremental cash flows is 11%. Nike is trying to decide whether it should offer 35% of its stock or €37 million in cash to Adidas's shareholders.
Instructions:
Problem 1: What is the cost of each alternative?
Problem 2: What is the NPV of each alternative?
Problem 3: Which alternative should Nike choose and why?
Problem 4: What are some important factors in deciding whether to use stock or cash in an acquisition?
Problem 5: Explain what defensive tactics the managers of Adidas Corporation could use to resist acquisition.
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