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).