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ID: 2619218 • Letter: F
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fundamentals of cor fundamentals of cor fundamentals of cor fundamentals of cor fundamentals of cor fundamentals of cor fundamentals of cor fundamentals of cor Chapter 26 The Birdie Golf-Hybrid Golf Merger Input Area: Cash offer 350,000,000 2013 $400,000,000 $ 450,000,000 315,000,000 45,000,000 40,000,000 47,000,000 50,000,000 2012 Sales Production costs 276,000,000 40,000,000 37,000,000 Other expenses Depreciation EBIT Interest 11,000,000 37,500,000 $ 39,000,000 15,600,000 9,500,000 Taxable income Taxes (40%) Net income 15,000,000 $22,500,0002 Additions to retained earnings O. 17,000,000 Dividends from Hybrid today Stock price of acquirer Shares outstanding in acquirer Shares outstanding in target Borrowing rate $75,000,000 94.00 18,000,000 8,000,000 8% Hybrid WACC Hybrid cost of equity 12.40% 1 6.90% Terminal value of Hybrid in five years 300,000,000 Tax rate 40% Output Area: Year 0 $(350,000,000) Yea Acquisition of Hybrid Dividends from Hybrid Terminal value of company Total Present valuesExplanation / Answer
As per data given in question above , The Bridle Golf is aaquiring the Hybrid golf company with the mixed method of offering , the value will be paid in cash as well as in form of shares in new company .
The basic principle used in valuing a business is very similar to capital budgeting of projects. If the present value of incremental cash flows from the merger exceeds the present value of the amounts paid, than the investment should add value.The discount rate you should use in discounting the cash flows should be the Cost of Equity of the combined company or the target company; depending upon which cash flow stream you are measuring
NPV of the acquiring company , will use the cost of equity(16.90%) given in question to findthe true value and time n= 5yrs
NPV = Dividend apid + PV ( terminal value, i ,n )
= $75,000,000 + $300,000,000/(1+16.90%)^5 = $ 212419606
No of out standing shares = 8000000
Maximum value of share = NPV/outstanding share = $26.55 per share
Exchange ratio = Acquirer share value / Maximumvalue of acquiring firm
= $ 94 /$26.55 = 3.54 ........
Shareholders having 7 shares of acquiring company will get 2 shares in acquirer company .
Acquisition of Hybrid ($350,000,000) Dividend from Hybrid $75,000,000 Terminal value $300,000,000 Total value $25,000,000Related Questions
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