Penn Corp Is Analyzing the Possible Acquisition of Teller Company

question 9

Multiple Choice

Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total aftertax annual cash flows by $3.7 million indefinitely. The current market value of Teller is $103 million, and that of Penn is $151.7 million. The appropriate discount rate for the incremental cash flows is 9 percent. Penn is trying to decide whether it should offer 44 percent of its stock of $133 million in cash to Teller's shareholders. The cost of the cash alternative is _____, while the cost of the stock alternative is _____.

• A)$103,000,000; $130,156,889
• B)$103,000,000; $133,000,000
• C)$133,000,000; $103,000,000
• D)$133,000,000; $130,156,889
• E)$236,000,000; $103,000,000

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Definitions:

Elasticity of Supply

A measure of how much the quantity supplied of a good changes in response to a change in price.

Free Rider Problem

The Free Rider Problem occurs in situations where individuals or entities benefit from resources, goods, or services without paying for them, leading to underprovision of those goods or services.

Home Football Game

A football match played at the team's own stadium or official field, often having a supportive home crowd.

Free Rider

An individual or entity that benefits from resources, goods, or services without paying for them, often leading to market failures.