Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total after tax annual cash flow by $2 million indefinitely. The current market value of Teller is $43 million, and that of Penn is $89 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 $61 million in cash to Teller's shareholders.
1. What is the cost of each alternative?
2. What is the NPV of each alternative?
3. Which alternative should Penn choose?