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For the above mentioned question, could you provide me with your calculation, it’s just a five mark question in Section B, because I don’t understand what BPP has done in their kit answer to this question. It is very different from what the examiner has done in his answers which I don’t also understand. BPP have done the following, and I doubt it’s correct, as it’s very different to the published examiner’s answer so please provide me with your calculation and rationale. Thanks. BPP’s answer to this question (doesn’t make sense even):
If Nuvola Co’s shareholders are paid a 30% premium to current market value, they will receive 480 × 0.3 = $144 million of the additional value created by the combined company. Makonis Co’s shareholders will therefore receive 502.85 – 144 = $358.85 million of the additional value, which is 29.5% of the current equity value of Makonis Co.
If Nuvola Co’s shareholders are paid a 50% premium to current market value, they will receive 480 × 0.5 = $240 million of the additional value created by the combined company. Makonis Co’s shareholders will therefore receive 502.85 – 240 = $262.85 million of the additional value, which is 21.6% of the current equity value of Makonis Co.
If the premium is increased to 50%, Makonis Co’s share of the additional value falls by $96 million, or 7.9%.The examiner in his answer says that the value will drop by 5.3% so I’m confused please advise.
There is not as much difference between the two answers as seems at first glance.
The total addition value is 503.95 per the examiner and 502.85 per BPP, but this is just due to rounding/using tables and is minor.
The real difference is the way they have interpret what was asked for in part (b).
BPP have looked at the difference between a premium of 50% and 30%. With 30% M shareholders get 358.85 whereas with 50% they only get 262.85 – i.e. it is lower by the difference of 96.
However, the examiners answer has instead of comparing 50% with 30%, compared the effect on the share price of a premium of 50% with the current share price of $5.80 (and it is lower because more shares are offered).
Obviously interpreting it as the examiner has done would get full marks, but so would interpreting it as BPP has done (which I think is actually interpreting what was actually asked better).Thank you Very much for your reply . What I did was this:
I got a different value for the additional value created in (a):
The value of equity is $2204M as calculated in part (a) through the free cash flows to firm method.
Therefore the additional value added is $2204M – $1218M (M’s equity value originally). Therefore, the additional value added is the difference between the above two of $986M
I think this is the maximum price M should pay for N ($986 m)
Then I reasoned that if N’s shareholders accept a 30% premium then M co could pay (480*1.30) equals $624M
Therefore M shareholders would gain 986M – 624M = 362M, as the maximum price they should pay is the value created of 986M but they are only paying 624M
If N co demands 50% premium then M’s shareholders would gain by $986m – ($480M *1.50) = $266m
Therefore the effect of paying a 50% premium would be that M’s shareholders lose by $362m – $266m = $96m
Is this an acceptable approach for the exam? It is not laid out in the published answers but do you think that it is a correct and acceptable approach?
Yes certainly. I have not checked every single figure, but your approach is fine (and since your final result is the same then I would guess that your arithmetic is correct as well).
It would, I am sure, get full marks in the exam.
It does remind me to state something that may be already obvious to you, but do make sure for all calculation questions you set out your workings in a way that the marker can follow. Without wasting too much time, do write little headings for each bit of workings. The reason is that so often there is more than one way of arriving at the answer, but (not in this case) so often you are going to make a mistake somewhere and end up with a different answer. Provided that the marker can follow what you are trying to do then you will still get almost all of the marks, even if you are doing it a different way than the examiners own answer. The markers understand the subject well enough (and if they are not sure whether an approach is valid then they will check with the examiner).
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