Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › NUBO CO P4 DEC 2013 QUESTION 4 (B)
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- April 18, 2015 at 10:42 am #241691
The above mentioned question, BPP’s answer to it, had a line stating:
Using the same PE ratio method used in part (a), the aircraft parts division can be valued at 12 × $83m = $996m. The two separate businesses would be valued at a total of $1,577m (996m + $581m). If the value of the existing business is currently less than $1,577m, then a demerger could be worthwhile.
I get the calculations but why is that if the value of the exiting business (Nubo Co) is less than the valuations of the two businesses combined (based on P/E MODEL) then a demerger is worthwhile. What makes the demerger worth it and why is this the case?
Is it that due to separating the two divisions, their share prices will increase as a result of the increased valuations and the shareholders can make a greater capital gain?
April 18, 2015 at 2:39 pm #241712Yes 🙂
If the two businesses separately are worth more in total than the two combined, then shareholders will be better off if they demerge.
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