Al's Is Analyzing the Possible Acquisition of Baker's

question 61

Multiple Choice

Al's is analyzing the possible acquisition of Baker's. Both firms have no debt. Al's believes the acquisition will increase its total aftertax annual cash flows by $2.8 million indefinitely. The current market value of Baker's is $91 million, and that of Al's is $143.6 million. The appropriate discount rate for the incremental cash flows is 11 percent. Al's is trying to decide whether it should offer 40 percent of its stock or $104 million in cash to Baker's shareholders. The cost of the cash alternative is ________, while the cost of the stock alternative is ________.

• A) $91,000,000; $90,824,141
• B) $91,000,000; $104,000,000
• C) $91,000,000; $91,338,092
• D) $104,000,000; $104,021,818
• E) $104,000,000; $103,837,209

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Definitions:

Operating Activities

These are the day-to-day activities of a business related to its primary operations, such as selling products or providing services, which are reflected in the cash flows of a company.

Cash Flow

The total amount of money being transferred into and out of a business, especially affecting liquidity and overall financial health.

Investing Activities

Transactions and events related to the acquisition and disposal of long-term assets and other investments not considered as cash equivalents.

Consolidated Statement

Financial statements that aggregate the financial information of a parent company and its subsidiaries into one document.