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 $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 outstanding. Hybrid Golf has 8 million shares outstanding. Both companies can borrow at an 8 per cent interest rate. Bryce 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 $600 million. Bryce has asked you to analyse the financial aspects of the potential merger. Specifically, he has asked you to answer the following questions: 2015 $ 2016 $ 2017 2018 2019 $ Sales 800000000 Production costs 562000000 Depreciation 75000000 630000000 80000000 1125000000 1000000000 900000000 700000000 1250000000 82000000 790000000 875000000 83000000 Other expenses 80000000 90000000 100000000 83000000 113000000 125000000 EBIT 83000000 100000000 118000000 139000000 167000000 Interest 19000000 22000000 24000000 25000000 27000000 Taxable income 64000000 78000000 94000000 114000000 140000000 Taxes (40%) 25600000 31200000 37600000 45600000 56000000 Net income 38 400000 46800000 56400000 68400000 84000000 Additions to 34000000 27 000000 27000000 25000000 retained earnings QUESTIONS 1. Suppose Hybrid shareholders agree to a merger price of $68.75 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 share exchange. What exchange ratio would make the merger terms equivalent to the original merger price of $68.75 per share? 4. What is the highest exchange ratio Birdie should be willing to pay and still undertake the merger?