4. What is the highest exchange ratio Birdie should be willing to pay and still undertake the merger?

Birdie Golf Ltd has been in merger talks with Hybrid Golf Company for the past six months. After several rounds of negotiations, the offer under discussion is a cash offer of $18.5 million for Hybrid Golf. Both companies have niche markets in the golf club industry, and both believe that a merger will result in synergies due to economies of scale in manufacturing and marketing, as well as significant savings in general and administrative expenses.

If Birdie Golf buys Hybrid Golf, an immediate dividend of $5.5 million would be paid from Hybrid Golf to Birdie. Shares in Birdie Golf currently sell for $87 per share, and the company has 1.8 million shares outstanding. Hybrid Golf has 0.8 million shares outstanding. Both companies can borrow at an 8 per cent interest rate. Bruce believes the current cost of capital for Birdie Golf is 11 per cent. The cost of capital for Hybrid Golf is 12.4 per cent, and the cost of equity is 16.9 per cent. In five years, the value of Hybrid Golf is expected to be $23.5 million.

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2021 2022 2023 2024 2025 Revenue $33 000 000 $37500000 $41 500 000 $44 500 000 $49 500 000 Production 23100000 26250000 29050000 31150000 34650000 costs Other expenses 3300000 3800000 4100 000 4500000 4900000 2700 000 3100000 3300000 3600000 3600000 Depreciation $ 3900 000 $ 4350000 $ 5050000 $ 5250000 $ 6350000 EBIT 750000 900000 1000000 1050000 1100000 Interest $ 3150000 $ 3450000 $ $ 4200 000 $ 5250000 Profit before 4050000 tax 945 000 1035 000 1260000 1575000