THE OFFER

In a recent AGM, the executive team and shareholders of Simons Exploration were in disagreement with the bids being made by certain companies such as Garfunkel Hydro for issued shares. The executive team of Simon Explorations isn't sure about whether to accept a cash bid offered for the issued shares by Garfunkel Hydro and asks you, a highly paid financial consultant, for your advice. Garfunkel Hydro also has a $630,000 tax loss carry-forward that Simon Explorations can apply over the next 2 years. Garfunkel Hydro estimates that it can give $162,500 in after-tax cash flow (after tax income + CCA) each year for the next 20 years. ($315,000 per year).

Simon Explorations has other offers but the one by Garfunkel Hydro seems particularly aggressive to the executives and they are not sure how to handle it. At the same time ,they also know a minority of their shareholders are excited about the bid as they have connections and profited greatly from Garfunkel Hydro in their previous dealings.

SOLVE and ANALYZE:

1A. Calculate the numbers for the execs. If Simon Explorations's corporate tax rate is 34% & its cost of capital is 12%, what is the maximum cash price it should be willing to pay to acquire Garfunkel Hydro? (15 marks)

1B. Based on your numbers and calculations, provide Simon Exploration company with financial advice of what could be the best options for them going forward. Outline what other short, medium and long term risks and opportunities they might face accepting this offer.