Question

The below homework question is from the BIRDIE GOLF case study in the Corporate Finance book (11th Edition) page 921:

Please provide at least two or three sentences in answering the question. SHOW ALL CALCULATIONS. Thank you.

2. What is the highest price per share that Birdie should be willing to pay for Hybrid?

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 negotiations, the offer under discussion is a cash offer of $352 million for Hybrid Golf. Both companies have niche markets in the golf club industry, and the companies believe a merger will result in significant 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:

	2015	2016	2017	2018	2019
Sales	$512,000,000	$576,000,000	$640,000,000	$720,000,000	$800,000,000
Production Costs	359,200,000	403,200,000	448,000,000	505,600,000	564,000,000
Depreciation	48,000,000	51,200,000	52,800,000	53,120,000	53,600,000
Other Expenses	51,200,000	57,600,000	64,000,000	72,320,000	77,600,000
EBIT	$ 53,600,000	$ 64,000,000	$ 75,200,000	$88,960,000	$104,800,000
Interest	12,160,000	14,080,000	15,360,000	16,000,000	17,280,000
Taxable Income	$ 41,440,000	$49,920,000	$59,840,000	$72,960,000	$87,520,000
Taxes 40%	16,576,000	19,968,000	23,936,000	29,184,000	35,008,000
Net Income	$24,864,000	$29,952,000	$35,904,000	$43,776,000	$52,512,000

Bryce is also aware that the Hybrid Golf division will require investments each year for continuing operations, along with sources of financing. The following table outlines the required investments and sources of financing:

	2015	2016	2017	2018	2019
Investments:
Networking Capital	$12,800,000	$16,000,000	$16,000,000	$19,200,000	$19,200,000
Fixed Assets	9,600,000	16,000,000	11,520,000	76,800,000	4,480,000
TOTAL	$22,400,000	$32,000,000	$27,520,000	$96,000,000	$23,680,000
Sources of Financing:
New Debt	$22,400,000	$10,240,000	$10,240,000	$9,600,000	$7,680,000
Profit Retention	$0	$21,760,000	$17,280,000	$17,280,000	$16,000,000
TOTAL	$22,400,000	$32,000,000	$27,520,000	$26,880,000	$23,680,000

The management of Birdie Golf feels that the capital structure at Hybrid Golf is not optimal. If the merger takes place, Hybrid Golf will immediately increase its leverage with a $71 million debt issue, which would be followed by a $96 million dividend payment to Birdie Golf. This will increase Hybrid’s debt-to-equity ratio from .50 to 1.00. Birdie Golf will also be able to use a $16 million tax loss carryforward in 2016 and 2017 from Hybrid Golf’s previous operations. The total value of Hybrid Golf is expected to be $576 million in five years, and the company will have $192 million in debt at that time. Stock in Birdie Golf currently sells for $94 per share, and the company has 11.6 million shares of stock outstanding. Hybrid Golf has 5.2 million shares of stock outstanding. Both companies can borrow at an 8 percent interest rate. The risk-free rate is 6 percent, and the expected return on the market is 13 percent. Bryce believes the current cost of capital for Birdie Golf is 11 percent. The beta for Hybrid Golf stock at its current capital structure is 1.30.

Answer 1

Hybrid Cost of Equity(6+1.3*7)	15.10%
Cost of Debt	8%
Weighted Average cost of Capital	13.325 %

	Year 0	2019
Cash offer	-352
Dividend	-96
Terminal value		576
Total	-448	576
Discount rate	1	0.50
Present Value	-448.00	285.13
NPV	-162.87

Highest Price =$285.13 Million

Highest Price/share = 285.13/5.2 =$54.83/share

Because this is a cash acquisition, we wouldn’t have to generate additional shares upon acquisition, so we would just divide the new “highest” price acceptable by Hybrid’s current number of shares outstanding (5,200,000), giving you theprice per share Hybrid is getting for the merger.