CASE 3 (25 points) Poppy Corporation is analysing the possible acquisition of Tulip Company

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CASE 3 (25 points) Poppy Corporation is analysing the possible acquisition of Tulip Company. There are two alternatives for Poppy: to use cash or stock as payment. Both firms have no debt. Poppy believes the acquisition will increase its total after-tax annual cash flow by €1.3 million indefinitely. The current market value of Tulip is €27 million, and that of Poppy is €62 million. The appropriate discount rate for the incremental cash flows is 11 percent. Poppy is trying to decide whether it should offer 35 percent of its stock or €37 million in cash to Tulip’s shareholders.

Instructions:

a. What is the cost of each alternative? (5 points)

b. What is the NPV of each alternative? (5 points)

c. Which alternative should Poppy choose? (5 points)

d. What are some important factors in deciding whether to use stock or cash in an acquisition? (5 points)