Step 1 of 7

a) P Corp. is analyzing the possible acquisition of firm B by using a cash offer or stock
offer. We need to calculate the cost of each offer and choose which one firm A should
prefer to use based on the value of the net present value (NPV) under each type of offer.

Step 2 of 7

Given data:

The cost of cash offer

is just the amount of
cash offered, which is
$61,000,000.

Step 3 of 7

In order to find the cost of the stock offer, we need to calculate the value of Firm B to
Firm A:

Step 4 of
7

The cost of the stock offer is:

Therefore, the cost of the stock offer is $60,800,000.

Step 5 of 7

b) Now we need to calculate the Net Present Value (NPV) of each type of offer for the
acquisition of firm B.

The NPV of the cash offer is:

The NPV of the cash offer is $2,000,000

Step 6 of 7

The NPV for the stock offer is as follows:

The NPV of the

stock offer is
$2,200,000.

Step 7 of 7

c) P Corp. should choose the stock offer because it has the highest NPV.