Penn CorpIs Analyzing the Possible Acquisition of Teller Company

question 80

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 40 percent of its stock of $127 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; $118,324,444
• B)$103,000,000; $127,000,000
• C)$127,000,000; $103,000,000
• D)$127,000,000; $118,324,444
• E)$236,000,000; $103,000,000

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Definitions:

Macroeconomic Equilibrium

The state in which the aggregate demand equals aggregate supply in an economy, leading to stability in the general price level and full employment.

Aggregate Supply Curve

A graphical representation that shows the relationship between the overall price level in an economy and the total output produced by firms.

Aggregate Demand Curve

Represents the total quantity of all goods and services demanded by the economy at different price levels.

Aggregate Demand Curve

A curve that represents the total demand for all goods and services in an economy at different price levels, holding all else constant.