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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 $4 million indefinitely. The current market value of Teller is $43 million, and that of Penn is $88 million. The appropriate discount rate for the incremental cash flows is 10 percent. Penn is trying to decide whether it should offer 40 percent of its stock or $69 million in cash to Teller's shareholders.
a. What is the cost of each alternative? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
Cash cost $
Equity cost $
b. What is the NPV of each alternative? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
NPV cash $
NPV stock $
c. Which alternative should Penn choose?
Stock
Cash
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