Reference no: EM132791591

Nike Corporation is analyzing 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.