Question
The Elgin Golf Dutton Golf Merger Elgin Golf Inc. has been in merger talks with Dutton Golf Company for the past six months. After
The Elgin GolfDutton Golf Merger
Elgin Golf Inc. has been in merger talks with Dutton Golf Company for the past six months. After
several rounds of negotiations, the offer under discussion is a cash offer of $ million for Dutton
Golf. Both companies have niche markets in the golf club industry, and both believe that a merger
will result in synergies due to economies of scale in manufacturing and marketing, as well as significant
savings in general and administrative expenses.
Bruce Wayne, the financial officer for Elgin, has been instrumental in the merger negotiations.
Bruce has prepared the following pro forma financial statements for Dutton Golf, assuming the
merger takes place. The financial statements include all synergistic benefits from the merger.
If Elgin Golf buys Dutton Golf, an immediate dividend of $ million would be paid from Dutton
Golf to Elgin. Stock in Elgin Golf currently sells for $ per share, and the company has million
shares of stock outstanding. Dutton Golf has million shares of stock outstanding. Both companies
can borrow at an interest rate. Bruce believes the current cost of capital for Elgin Golf is
The cost of capital for Dutton Golf is and the cost of equity is In five years, the
value of Dutton Golf is expected to be $ million.
Bruce has asked you to analyze the financial aspects of the potential merger. Specifically, he has
asked you to answer the following questions:
Suppose Dutton shareholders will agree to a merger price of $ per share. Should
Elgin proceed with the merger?
What is the highest price per share that Elgin should be willing to pay for Dutton?
Suppose Elgin is unwilling to pay cash for the merger but will consider a stock exchange.
What exchange rate would make the merger terms equivalent to the original merger price
of $ per share?
What is the highest exchange ratio Elgin should be willing to pay and still undertake the
merger?
Sales $ $ $ $ $
Production costs
Depreciation
Other expenses
EBIT $ $ $ $ $
Interest
Taxable income $ $ $ $ $
Taxes
Net income $ $ $ $ $
Additions to retained
earnings
$ $ $ $
MINI CASE
Step by Step Solution
There are 3 Steps involved in it
Step: 1
1 Should Elgin proceed with the merger if Dutton shareholders agree to a merger price of 3125 per share First calculate the total cost of the acquisition at 3125 per share TotalCost PriceperShare Numb...Get Instant Access to Expert-Tailored Solutions
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Step: 2
Step: 3
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