Birdie Golf, Inc., 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 $282 million for Hybrid Golf. Both companies have niche markets in the golf club industry, and the companies believe a merger will result in significant synergies due to economies of scale in manufacturing and marketing, as well as significant savings in general and administrative expenses.

Bryce Bichon, the financial officer for Birdie, has been instrumental in the merger negotiations. Bryce has prepared the following pro formula financial statements for Hybrid Golf assuming the merger takes place. The financial statements include all synergistic benefits from the merger:

Bryce also is aware that the Hybrid Golf division will require investments each year for continuing operations, along with sources of financing. The following table outlines the required investments and sources of financing.

The management of Birdie Golf feels that the capital structure at Hybrid Golf is not optimal. If the merger takes place, Hybrid Golf will immediately increase its leverage with a $57 million debt issue, which would be followed by a $76 million dividend payment to Birdie Golf. This will increase Hybrids debt-equity ratio from .50 to 1.00. Birdie Golf also will be able to use a $12.8 million tax loss carryforward in both 2020 and 2021 from Hybrid Golfs previous operations. The total value of Hybrid Golf is expected to be $460.8 million in five years, and the company will have $153.6 million in debt at that time.

Stock in Birdie Golf currently sells for $94 per share, and the company has 11.6 million shares of stock outstanding. Hybrid Golf has 5.2 million shares of stock outstanding. Both companies can borrow at an 8 percent interest rate. The risk-free rate is 6 percent, and the expected return on the market is 13 percent. Bryce believes the current cost of capital for Birdie Golf is 11 percent. The beta for Hybrid Golf stock at its current capital structure is 1.30.

Bryce has asked you to analyze the financial aspects of the potential merger. Specifically, he has asked you to answer the following questions:

1. Suppose Hybrid shareholders will agree to a merger price of $63.25 per share. Should Birdie proceed with the merger?
2. What is the highest price per share that Birdie should be willing to pay for Hybrid?
3. Suppose Birdie is unwilling to pay cash for the merger but will consider a stock exchange. What exchange ratio would make the merger terms equivalent to the original merger price of $63.25 per share?
4. What is the highest exchange ratio Birdie would be willing to pay and still undertake the merger?

\begin{tabular}{|l|c|c|c|c|c|} \hline & 2019 & 2020 & 2021 & 2022 & 2023 \\ \hline Sales & $409,600,000 & $460,800,000 & $512,000,000 & $576,000,000 & $640,000,000 \\ Production Costs & $287,400,000 & $322,500,000 & $358,400,000 & $404,500,000 & $451,200,000 \\ \hline Depreciation & $38,400,000 & $40,900,000 & $42,300,000 & $42,500,000 & $43,900,000 \\ \hline Other Expenses & $40,900,000 & $46,100,000 & $51,200,000 & $57,900,000 & $63,100,000 \\ \cline { 2 - 8 } & $42,900,000 & $51,300,000 & $60,100,000 & $71,100,000 & $81,800,000 \\ \hline Interest & $9,730,000 & $11,260,000 & $12,300,000 & $12,800,000 & $13,800,000 \\ \hline Taxable income & $33,170,000 & $40,040,000 & $47,800,000 & $58,300,000 & $68,000,000 \\ \hline Taxes (25%) & $8,292,500 & $10,010,000 & $11,950,000 & $14,575,000 & $17,000,000 \\ \hline Net income & $24,877,500 & $30,030,000 & $35,850,000 & $43,725,000 & $51,000,000 \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|c|c|c|c|} \hline \multirow{2}{*}{ Inves tments: } & \multicolumn{2}{|r|}{2019} & \multirow{2}{*}{\multicolumn{2}{|c|}{2020}} & \multicolumn{2}{|r|}{2021} & 2022 & \multirow[t]{2}{*}{2023} \\ \hline & & & & & & & & \\ \hline Net working capital & & 10,200,000 & $ & 12,800,000 & & 12,800,000 & $15,400,000 & $15,400,000 \\ \hline Fixed assets & $ & 7,700,000 & $ & 13,800,000 & $ & 9,300,000 & $31,400,000 & $3,900,000 \\ \hline Total & $ & 17,900,000 & $ & 26,600,000 & s & 22,100,000 & $46,800,000 & $19,300,000 \\ \hline Sources & & & & & & & & \\ \hline New debt & $ & 17,900,000 & & 9,200,000 & & 8,200,000 & $15,000,000 & $6,100,000 \\ \hline Profit r & $ & \begin{tabular}{ccc} - \\ - \end{tabular} & $ & 17,400,000 & s & 13,900,000 & $31,800,000 & $13,200,000 \\ \hline Total & $ & 17,900,000 & $ & 26,600,000 & $ & 22,100,000 & $46,800,000 & $19,300,000 \\ \hline \end{tabular}