1. The present value of the incremental cash flows needs to be calculated as part of judging the feasibility of the merger. The acquisition price of hybrid added to the dividends paid currently would give us a total of $(320,000,000). Similarly, the given data may help us calculate the 5 year cash flow for Birdie Golf. In year 1, the total cash flow would be $31,080,000 and by the end of year 5 this would increase to $1,005,640,000 as the terminal value of $720,000,000 would be earned in year 5. (Ross, Westerfield & Jaffe, 2013)
The weight of debt in the company is 0.33; consequently, the weight of equity would be (1-0.33) and total 0.67. Calculation of the beta for hybrid gives us 0.96; this would help us determine the return for normal operations from hybrid that is 12.73%.
The new beta for the merged hybrid is 1.59 and the discount rate for dividends is 17.13%. Given the above calculations it is now possible to calculate the net present value. The discount rate for dividends, tax loss, total value of equity, and total value of debt are; 17.13%, 8%, 12.73%, and 8% respectively. This helps us calculate the net present value of acquisition of $31,890,413.71.
2. The Birdie Golf would want to increase the offer to $471,890,413.71 as the NPV of the acquisition is positive. This value of highest offer would be arrived at after adding $440,000,000 and $31,089,413.71. The highest offer made by Birdie Golf of $471,890,413.71 divided by outstanding shares of 6,400,000 would give the highest share price of $73.73.
3. The new share price under the original cash offer made by Birdie Golf needs to be calculated so that we can identify the current exchange ratio for the cash offer and share offer equivalent. The new share price would then be $96.21. Consequently, the exchange ratio is ($68.75/$96.21) 0.7145.
4. An exchange ratio which would give a zero net present value to Birdie Golf would also be the highest exchange ratio. Once Birdie Gold merges with Hybrid Golf the share price would remain unchanged as a result of the zero NPV. Therefore, the exchange ratio is $68.75/$94= 0.7314.
Offenberg, D., & Pirinsky, C. (n.d.). How do Acquirers Choose between Mergers and Tender Offers? . How do Acquirers Choose between Mergers and Tender Offers? . Retrieved March 1, 2014, from http://myweb.lmu.edu/ccfc/index_files/Fall12/david.pdf
Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013). Corporate finance (10th ed.). New York: McGraw-Hill Irwin