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    Assignment Corporate Finance

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    Rose Abd Rahim
    Birdie is considering acquiring Hybrid through a cash merger at $68.75 per share. 1) The net present value of the acquisition is positive, so the maximum price Birdie should offer is $59,015,774 or $7.383 per share. 2) If the merger was done through a stock exchange instead of cash, an exchange ratio of 0.7178 Hybrid shares for each Birdie share would make the terms equivalent to the original $68.75 per share cash price. 3) The highest exchange ratio Birdie should be willing to pay is 0.68, which values each Hybrid share at $63.73, below the expected market value but still positive net present

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    Assignment Corporate Finance

    Uploaded by

    Rose Abd Rahim
    393 views3 pages
    Birdie is considering acquiring Hybrid through a cash merger at $68.75 per share. 1) The net present value of the acquisition is positive, so the maximum price Birdie should offer is $59,015,774 or $7.383 per share. 2) If the merger was done through a stock exchange instead of cash, an exchange ratio of 0.7178 Hybrid shares for each Birdie share would make the terms equivalent to the original $68.75 per share cash price. 3) The highest exchange ratio Birdie should be willing to pay is 0.68, which values each Hybrid share at $63.73, below the expected market value but still positive net present

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    Birdie is considering acquiring Hybrid through a cash merger at $68.75 per share. 1) The net present value of the acquisition is positive, so the maximum price Birdie should offer is $59,015,774 or $7.383 per share. 2) If the merger was done through a stock exchange instead of cash, an exchange ratio of 0.7178 Hybrid shares for each Birdie share would make the terms equivalent to the original $68.75 per share cash price. 3) The highest exchange ratio Birdie should be willing to pay is 0.68, which values each Hybrid share at $63.73, below the expected market value but still positive net present

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    393 views3 pages

    Assignment Corporate Finance

    Uploaded by

    Rose Abd Rahim
    Birdie is considering acquiring Hybrid through a cash merger at $68.75 per share. 1) The net present value of the acquisition is positive, so the maximum price Birdie should offer is $59,015,774 or $7.383 per share. 2) If the merger was done through a stock exchange instead of cash, an exchange ratio of 0.7178 Hybrid shares for each Birdie share would make the terms equivalent to the original $68.75 per share cash price. 3) The highest exchange ratio Birdie should be willing to pay is 0.68, which values each Hybrid share at $63.73, below the expected market value but still positive net present

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    of 3
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    The analysis examines the present value of incremental cash flows from acquiring Hybrid to determine if the merger is beneficial. It also calculates required rates of return and discount rates.

    The highest price per share Birdie should pay is $7.383

    The exchange ratio that would make the cash and stock offers equivalent is 7/9.62

    1. Suppose Hybrid shareholders will agree to a merger price of $68.75 per share.

    Should Birdie proceed with the merger?


    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
    costs plus the dividends paid today, or: Acquisition of Hybrid–$55,000,000Dividends
    from Hybrid$15,000,000Total–$40,000,000Using the information provided,. 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 abnormal rate. Current weight of debt and weight of equity in
    Hybrid’s capital structure is:
    wB= 0.50 / (1 + 0.50)
    wB= 0.33wS= 1 – 0.33
    wS= 0.67
    The beta for Hybrid’s debt is:
    βB= (0.08 – 0.06) / (0.13 – 0.06)
    βB= 0.29
    Thus, the overall beta for Hybrid is: βH= (0.33 × 0.29) + (0.67 × 1.30) βH= 0.96
    Now, we can calculate the required return for normal operations of Hybrid, which is:
    rH= 0.06 + 0.96(0.13 – 0.06)
    rH= 0.1273 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:
    ΒNew= [βOld– (wB–new× wB–old)] / wS–new
    ΒNew= [0.96 – (0.50 × 0.33)] / 0.50
    ΒNew= 1.59
    So, the discount rate for the dividends to be paid in future is:
    rDiv= 0.06 + 1.59(0.13 – 0.06)
    rDiv= 0.1713 or 17.13%
    2. What is the highest price per share that Birdie should be willing to pay for
    Hybrid?
    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:
    Highest offer = $55,000,000 + $4,015,774
    Highest offer = $59,015,774
    The highest share price is the total high offer price, divided by the shares outstanding, or:
    Highest share price = $59,015,774/ 8,000,000 shares
    Highest share price = $7.383

    3. Suppose Birdie is unwilling to pay cash for the merger but will consider a
    stock exchange. What exchange ratio would make the merger terms equivalent
    to the original merger price of $68.75 per share?
    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:
    PNew= [$9.4 × 18,000,000 + $4,015,774] / 18,000,000
    PNew= $9.62
    So, the exchange ratio which would make the cash offer and share offer equivalent is:
    Exchange ratio = $6.88/ $9.62

    4. What is the highest exchange ratio Birdie would be willing to pay and still
    undertake the merger?
    The highest exchange ratio that Birdie should be ready to give and still proceed with the
    merger is 0.68. Financial figures have shown that the expected market value of hybrid is
    $331,376,222. Given that Hybrid has 5.2 million outstanding shares, the price per share that
    Birdie should be willing to pay for Hybrid us $63.73. Therefore, the highest exchange ratio is
    obtained by dividing this price per share with price per share of Birdie stock ($63.74/ $94).

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