# (SOLVED) Yummy Burgers is analyzing the possible acquisition of Apple Pizzas. Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would increase its annual aftertax cash flow by \$390,000 indefinitely.

Discipline: Finance

Type of Paper: Question-Answer

Academic Level: Undergrad. (yrs 1-2)

Paper Format: APA

Pages: 1 Words: 109

Question

Yummy Burgers is analyzing the possible acquisition of Apple Pizzas. Neither firm has debt. The forecasts of Fly-By-Night 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?-

Expert Solution Preview

a) Synergy from merger = Present value of incremental cashflows

= CFAT / Ke = 390000 / 0.08 = \$4875000

b) Value of Apple pizzas = Value of Apple pizzas + Synergy from merger

= 8000000 + 4875000 = \$12875000

c) Cost to Yummy burger......