he Birdie Golf-Hybrid Golf Merger Birdie Golf, Inc., has been in merger talks with Hybird Golf Company for the past six months. After several rounds of negotiations, the offer under discussion is a cash offer of $550 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. Bryce Bichon, the financial officer for Birdie, has been instrumental in the merger negotiations. Bryce has prepared the following pro forma financial statements for Hybrid Golf assuming the merger takes place. The financial statements include all synergistic benefits from the merger.

If Birdie Golf buys Hybrid Golf, an immediate dividend of $150 million would be paid from Hybrid Golf to Birdie. Stock in Birdie Golf currently sells for $94 per share, and the company has 18 million shares of stock outstanding. Hybrid Golf has 8 million shares of stock outstanding. Both companies can borrow at an 8 percent interest rate. Bryce believes the current cost of capital for Birdie Golf is 11 percent. The cost of capital for Hybrid Golf is 12.4 percent, and the cost of equity is 16.9 percent. In five years, the value of Hybrid Golf is expected to be $600 million. 4.

Under the cash offer of $68.75/share, what would be Birdies new price after the merger?

		$68.75
		$74.28
		$94
		$96.46

5.

What is the highest offer Birdie can make?

$594,254,610

$44,254,610

$400,000,000

$650,000,000 6.

Instead of the cash offer of $68.75/share, Birdie is considering a stock exchange. What would be the highest exchange ratio Birdie should be willing to pay and still undertake the merger?

		0.71
		1.00
		0.79
		0.92

Sales Production costs Depreciation Other expenses EBIT Interest Taxable income Taxes (40%) Net income Additions to retained earnings $800,000,000 900,000,000 $1,000,000,000 $1,125,000,000 $1,250,000,000 562,000,000 630,000,000 700,000,000 790,000,000 875,000,000 75,000,000 80,000,000 82,000,000 83,000,000 83,000,000 80,000,000 90,000,000 100,000,000 113,000,000 125,000,000 83,000,000 100,000,000 118,000,000 139,000,000 167,000,000 19,000,000 22,000,000 24,000,000 25,000,000 27.000.000 64,000,000 78,000,000 94,000,000 114,000,000 140,000,000 25,600,000 31,200,000 37,600,000 45,600,000 56,000,000 38,400,000 46,800,000 56,400,000 68,400,000 84,000,000 0 34,000,000 27,000,000 27,000,000 25,000,000 Sales Production costs Depreciation Other expenses EBIT Interest Taxable income Taxes (40%) Net income Additions to retained earnings $800,000,000 900,000,000 $1,000,000,000 $1,125,000,000 $1,250,000,000 562,000,000 630,000,000 700,000,000 790,000,000 875,000,000 75,000,000 80,000,000 82,000,000 83,000,000 83,000,000 80,000,000 90,000,000 100,000,000 113,000,000 125,000,000 83,000,000 100,000,000 118,000,000 139,000,000 167,000,000 19,000,000 22,000,000 24,000,000 25,000,000 27.000.000 64,000,000 78,000,000 94,000,000 114,000,000 140,000,000 25,600,000 31,200,000 37,600,000 45,600,000 56,000,000 38,400,000 46,800,000 56,400,000 68,400,000 84,000,000 0 34,000,000 27,000,000 27,000,000 25,000,000