Hamilton Travel, Inc., was in merger talks with Golden Park Company for the past six months. Now it is December 2015. After several rounds of negotiations, the offer under discussion is a cash offer of $250 million for Golden Park. Both companies have niche markets in the tourism 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. Peter Josh, the financial officer for Hamilton Travel, has been instrumental in the merger negotiations. Peter has prepared the following forecasts of financial statements in the next five years for Golden Park assuming the merger takes place. The financial statements include all synergistic benefits from the merger. 2018 Sales Production costs Other expenses Depreciation 2016 $360,000,000 248,000,000 36,000,000 33,000,000 $ 43,000,000 8,500,000 $ 34,500,000 13,800,000 $ 20,700,000 EBIT 2017 $405,000,000 284,000,000 41,000,000 36.000.000 $ 44,000,000 10.000.000 $ 34,000,000 13,600,000 $ 20,400,000 $ 15,400,000 $450,000,000 315,000,000 45,000,000 37.000.000 $ 53,000,000 11,000,000 $ 42,000,000 16,800,000 $ 25,200.000 $ 11,700,000 2019 $508.500.000 355,500,000 51,000,000 38,000,000 $ 64,000,000 11,250,000 $ 52,750,000 21,100,000 $ 31,650,000 $ 11,700,000 2020 $562,500,000 393,000,000 56,000,000 38.000.000 $ 75,500,000 12,500,000 $ 63,000,000 25,200,000 $ 37,800,000 $ 10,800,000 Interest Taxable income Taxes (40%) Net income Additions to retained earnings 0 If Hamilton Travel buys Golden Park, an immediate dividend of $67.5 million would be paid from Golden Park to Hamilton Travel. Stock in Hamilton Travel currently sells for $87 per share, and the company has 18 million shares of stock outstanding. Golden Park has 8 million shares of stock outstanding. Both companies can borrow at an 8 percent interest rate. Peter believes the current cost of capital Hamilton Travel is 11 percent. The cost of capital for Golden Park is 12.4 percent, and the cost of equity is 16.9 percent. In five years, the value of Golden Park is expected to be $270 million after accounting for all the cash flows taking place after the fifth year. Given the information above, help Peter to answer the questions below: 1. Suppose Golden Park shareholders will agree to a merger price of $31.25 per share. Should Hamilton Travel proceed with the merger in terms of NPV? Hints: a. You can treat dividends per week (net income minus additions to retained earnings) from Gold Park in the table of forecasted financial statement as cash flows relating to 3 synergistic benefits of the merger each year. You can discount them and sum discounted dividends for calculation of NPV. b. NPV of the merger = - costs incurred by the merger for Hamilton Travel + discounted future synergistic benefits from merging with Golden Park + discounted terminal value of Golden Park. c. Pay attention to using the correct discount rates for discounted cash flows. 2. What is the highest price per share that Hamilton Travel should be willing to pay for Golden Park? Hints: Highest offer = Costs incurred by the merger for Hamilton Travel + NPV of the merger =
