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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:
Acquisition of Hybrid
–$282,000,000
Dividends from Hybrid
76,000,000
Total
–$206,000,000
discount rate. The additional cash flows from the tax-loss carry forwards and the proposed level of
debt should be discounted at the cost of debt because they are determined with very little uncertainty.
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:
wD = .50/(1 + .50)
E(RH) = .06 + .96(.13 – .06)
E(RH) = .1273, or 12.73%
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:
Discount
rate
Year 1
Year 2
Year 3
Year 4
Year 5
Dividends
17.13%
$21,238,617
$9,205,393
$13,658,186
$6,334,851
$17,143,097
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:
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
