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  2. Thank you for the great lecture sir.

    “Question (c) (i) : Estimates the additional value created for Avem Co, if it acquires Fugae Co without considering the luxury transport project.”

    I just do not understand why are we not using
    (Equity value Fugae $922.5m +174.7m value created attributable to Avem ) – cost 1200m = – $102.8m, reduced value

    My confusion is from interpretation of how question is asked, I mean if (c) (i) have asked “value created from combination synergy attributable to Avem”, then I have no problem with the answer and ok with $1200m purchase price being irrelevant.

    But question here asked “additional value created for Avem if acquires Fugae”, and the whole part (c) is from Avem’s perspective, then I will consider acquisition price $1200m as well, instead of synergies alone.

    Now sure i understood wrong Or is -$102.8 m acceptable too?

    • I am afraid that -$102.8m would not be acceptable.

      The total value of the combined company will be higher due to the synergy, both in terms of the extra $40m and the increase in the PE ratio.
      How much of the increase goes to Avem’s shareholders and how much to Nahara’s shareholders depends on how much premium is being paid, and the question does ask how much of the additional value goes to Avem.

      • Thank you sir. I am not sure when should we consider the purchase price and when not to.

        Is below correct?

        question here only asked value created, then we only consider value created from combination, instead of whole acquisition.

        If question have asked ” whether Avem should acquire Fugae, or to assess the acquisition of Fugae” ,
        then we should consider the purchase price $1200m and -$102.8m reduce value.

    • No. The 1,200 is not relevant because the total value of the enlarged company depends on the total future flows from the enlarged company. It is just a question as to how much of the increase in the total value goes to shareholders in Avem and how much goes to Nahara, and then depends on the premium paid.
      1,200 is only what they have proposed to pay. How much they actually pay depends on the premium offered.
      (And don’t forget that if they simply paid the current value of Fugae with no premium at all, and if we ignored the synergy etc benefits, then although the cash would fall by the amount paid, the net assets would increase by the same amount.)

  3. I’m so glad I watched this revision video again, given the exam is next week. I think it’s easy to become so overwhelmed by trying to get ‘everything right’, but Mr Moffat makes it clear that there will certainly be mistakes under exam conditions. Aiming to get those (at least) 25 marks for this question relatively easily has really put the 50-mark questions into perspective. Thank you Mr Moffat, and thank you for all the incredible lectures.

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