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 $250 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 $67.5 million would be paid from Dutton Golf to Elgin. Stock in Elgin Golf currently sells for $87 per share, and the company has 18 million shares of stock outstanding. Dutton Golf has 8 million shares of stock outstanding. Both companies can borrow at an 8% interest rate. Bruce believes the current cost of capital for Elgin Golf is 11%. The cost of capital for Dutton Golf is 12.4%, and the cost of equity is 16.9%. In five years, the value of Dutton Golf is expected to be $270 million. Bruce has asked you to analyze the financial aspects of the potential merger. Specifically, he has asked you to answer the following questions: 1. Suppose Dutton shareholders will agree to a merger price of $31.25 per share. Should Elgin proceed with the merger? 2. What is the highest price per share that Elgin should be willing to pay for Dutton? 3. 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 $31.25 per share? 4. What is the highest exchange ratio Elgin should be willing to pay and still undertake the merger? 2018 2019 2020 2021 2022 Sales $360,000,000 $ 405,000,000 $ 450,000,000 $ 503,500,000 $562,500,000 Production costs 248,000,000 234,000,000 315,000,000 355,500,000 393,000,000 Depreciation 36,000,000 41,000,000 45,000,000 51,000,000 56,000,000 Other expenses 33,000,000 36,000,000 37,000,000 38,000,000 38,000,000 EBIT $ 43,000,000 $ 44,000,000 $ 53.000,000 $ 64,000,000 S 75,500,000 Interest 8,500,000 10,000,000 11.000.000 11,250,000 12,500,000 Taxable income $ 34,500,000 $ 34,000,000 $ 42,000.000 $ 52,750,000 $ 63,000,000 Taxes (40%) 13,800,000 13.600,000 16,800,000 21,100,000 25,200,000 Net income S 20,700,000 $ 20.400,000 $ 25,200,000 $ 31,650,000 $ 37,800,000 Additions to retained earnings $ 15,400,000 S 11,700,000 $ 11,700,000 $ 10,800,000