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CHAPTER 29 CASE C-1
CHAPTER 29
THE BIRDIE GOLF–HYBRID GOLF
MERGER
1. As with any other merger analysis, we need to examine the present value of the incremental cash
flows. The cash flow today from the acquisition is the acquisition cost plus the dividends paid today,
or:
Using the information provided, the cash flows to Birdie Golf from acquiring Hybrid Golf for the
next five years will be:
Year 1 Year 2 Year 3 Year 4 Year 5
Terminal value of
equity 576,000,000
To discount the cash flows from the merger, we must discount each cash flow at the appropriate
The terminal value of the company is subject to normal business risk and must be discounted at a
normal rate. The current weight of debt and weight of equity in Hybrid’s capital structure is:
The beta for Hybrid’s debt is:
CHAPTER 29 CASE C-2
Now, we can calculate the required return for normal operations of Hybrid, which is:
To find the discount rate for dividends, we need to find the new beta of equity for the merged
Hybrid. The new debt–equity ratio is 1, which implies a weight of debt and a weight of equity equal
to 50 percent. The new beta for equity must be:
So, the discount rate for the dividends to be paid in future is:
Now we can find the present value of the future cash flows. The present value of each year’s cash
flows, along with the appropriate discount rate for each cash flow, is:
Discoun
t
rate Year 1 Year 2 Year 3 Year 4 Year 5
Dividends 17.13% $21,227,092 $5,970,751 $11,588,613 $14,075,321 $16,558,962
And the NPV of the acquisition is:
2. Since the acquisition is a positive NPV project, the most Birdie would offer is to increase the current
cash offer by the current NPV, or:
The highest share price is the total high offer price, divided by the shares outstanding, or:
CHAPTER 29 CASE C-3
3. To determine the current exchange ratio which would make a cash offer and a share offer equivalent,
we need to determine the new share price under the original cash offer. The new share price of Birdie
after the merger will be:
4. The highest exchange ratio Birdie would accept is an exchange ratio that results in a zero NPV
acquisition. This implies the share price of Birdie remains unchanged after the merger, so the
exchange ratio is:
