merger and acquisition
Firm Z has a current market value of $35 million and isconsidering the acquisition of firm Y, whose current market valueis $20 million. Both firms are all-equity. A market research studyby the investment bank hired by firm Z shows that a purchase offirm Y will increase the after-tax cash flows of Y by $600,000 inperpetuity. The appropriate discount rate for the incremental cashflow is 8%. a) What is the value of firm Y to firm Z? b)Firm Z is trying to decide whether to offer 25% of its own stocksor $21 million cash to shareholders of firm Y. If you were ashareholder of firm Z, which method of payment would you prefer forthe acquisition of firm Y and why?
