Rural Markets and Flo's Flowers are all-equity firms. Rural Markets has 2,300 shares outstanding at a market price of $16.50 a share. Flo's Flowers has 5,000 shares outstanding at a price of $17 a share. Flo's Flowers is acquiring Rural Markets for $39,000 in cash. The incremental value of the acquisition is $1,800. What is the net present value of acquiring Rural Markets to Flo's Flowers?

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The net present value of acquiring Rural Markets to Flo's Flowers is $750. This is calculated as follows:NPV = (Incremental Value of Acquisition) - (Cost of Acquisition)NPV = $1,800 - $39,000NPV = -$37,200However, we need to adjust the NPV for the fact that Flo's Flowers is acquiring Rural Markets for cash. This means that Flo's Flowers will have to pay taxes on the gain from the acquisition. The tax rate is assumed to be 35%.Tax on Gain = (Gain from Acquisition) x (Tax Rate)Tax on Gain = ($39,000 - $37,200) x 0.35Tax on Gain = $630The net present value of the acquisition, after adjusting for taxes, is $750.NPV = -$37,200 + $630NPV = -$36,570NPV = $750

Rural Markets and Flo's Flowers Are All-Equity Firms