please explain answers using financial calculations NOT EXCEL will give a good rating!
MINICASE The Birdie Golf-Hybrid Golf Merger Birdie Golf, Inc., has been in merger talks with Hybrid Golf Company for the past six months. After several rounds of ne- gotiations, the offer under discussion is a cash offer of $250 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. 892 PART 8 Topics in Corporate Finance 2016 Sales Production costs Other expenses Depreciation EBIT Interest Taxable income Taxes (40%) Net income $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 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 2018 $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 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 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 Additions to retained earnings 0 $ 11,700,000 $ 11,700,000 $ 10,800,000 If Birdie Golf buys Hybrid Golf, an immediate dividend of $67.5 million would be paid from Hybrid Golf to Birdie. Stock in Birdie Golf currently sells for $87 per share, and the company has 18 million shares of stock outstanding. Hybrid Golf has 8 million shares of stock outstanding. Both compa- nies 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 $270 million. Bryce has asked you to analyze the financial aspects of the potential merger. Specifically, he has asked you to answer the following questions. QUESTIONS 1. Suppose Hybrid shareholders will agree to a merger price of $31.25 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 $31.25 per share? 4. What is the highest exchange ratio Birdie should be willing to pay and still undertake the merger? MINICASE The Birdie Golf-Hybrid Golf Merger Birdie Golf, Inc., has been in merger talks with Hybrid Golf Company for the past six months. After several rounds of ne- gotiations, the offer under discussion is a cash offer of $250 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. 892 PART 8 Topics in Corporate Finance 2016 Sales Production costs Other expenses Depreciation EBIT Interest Taxable income Taxes (40%) Net income $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 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 2018 $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 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 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 Additions to retained earnings 0 $ 11,700,000 $ 11,700,000 $ 10,800,000 If Birdie Golf buys Hybrid Golf, an immediate dividend of $67.5 million would be paid from Hybrid Golf to Birdie. Stock in Birdie Golf currently sells for $87 per share, and the company has 18 million shares of stock outstanding. Hybrid Golf has 8 million shares of stock outstanding. Both compa- nies 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 $270 million. Bryce has asked you to analyze the financial aspects of the potential merger. Specifically, he has asked you to answer the following questions. QUESTIONS 1. Suppose Hybrid shareholders will agree to a merger price of $31.25 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 $31.25 per share? 4. What is the highest exchange ratio Birdie should be willing to pay and still undertake the merger
