(Solution) - Penn Corp is analyzing the possible acquisition of Teller Company -(2025 Original AI-Free Solution)

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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 after tax annual cash flows by $1.9 million indefinitely. The current market value of Teller is $41 million, and that of Penn is $79 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 $57 million in cash to Teller's shareholders.
a. What is the cost of each alternative?
b. What is the NPV of each alternative?
c. Which alternative should Penn choose?