You are the financial analyst of St. Louis Corporation. St. Louis Corporation is analyzing the possible acquisition of St. Romuald Corporation. Both firms have no debt. St. Louis Corporation believes the acquisition will increase its total after-tax annual cash flows by $1,000,000 indefinitely. The current market value of St. Romuald Corporation is $49,000,000, and that of St. Louis Corporation is $89,000,000. The appropriate discount rate for the incremental cash flows is 6%. St. Louis Corporation is trying to decide whether it should offer 40% of its stock or $62,000,000 in cash to St. Romuald Corporation’s shareholders. Based on the given information, please answer questions a, b, and c.
a) What is the cost of each alternative?
b) What is the NPV of each alternative?
c) Which alternative should St. Louis Corporation choose?
