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Sir in this question part in examiner solution i didnt get how he calculated total return as 1.33+4.62=5.95
As 2 share of strand is equal on of Hav
So is not net only 1.33 which they got as cash,please clarify.
In same year i mean June 13 can you please explain me answer of questiin 3 part c along with meaning of long call option and high gamma value. ThanksI see how you have read the question – however the question says that they get 1.33 cash for each share, plus 1 Hav share for every two shares
We call it a long call when you are buying a call option (if you are selling a call option (to then buy back later) it is called a selling short.
Gamma is one of the Greeks – they are explained in the lecture on option pricing – and measures the rate of change of delta ( N(d1)). You cannot be expected to calculate it (and although the examiner has written quite a bit, he cannot expect you to write all that in the exam 🙂Sir thanks for second point
still want to clarify first point they r getting 1.33 thats ok but for getting one Hav share they are giving two of strand share as well then actually in return they r getting only 1.33 as two of strand share is equal to one of hav share.still bit confused please help.For every share they are receiving 1.33 in cash. In addition, since for every 2 shares they receive 1 share in Hav worth 9.24, it means that for every 1 share in Strand they are getting 9.24/2 = 4.62
Thank you sir,now its clear ,this point did click me but was not sure if i m thinking right.Thanks for all your help and sorry that will keep u troubling till 2June.
Relating to method 2 of the same question, would the share price of combined company not change from 9.24 after the acquisition of strand?
And why have they not multiplied the number of shares given up by the shareholders of strand. As in they should have done( 5.95-4.77×2) ÷(4.77×2) right? Since its 1 hav share for every 2 shares of strand
Thanks
In part b, to calculate the premium under the excess earnings method, why have they subtracted 20% of the capital employed from 373?
And since in the question it’s mentioned “based on after tax earnings” why have thy used 373 and not 373×80% to arrive at the annual premium?
First question:
Yes the share price of the combined company will change from 9.24, but the shareholders of Strand will be basing their decision on what to accept on the current share price.Since it is 1 share for ever 2 shares of Strand, it means that for every 1 share of Strand they are receiving 0.5 shares in Hav (plus, obviously the cash).
Second question:
The question specifically says it is to be based on the excess of the earnings over the average return on capital employed of the industry. It also says that the industry’s average return on capital employed is 20%.
ROCE is always pre-tax. They have worked out the premium and then multiplied by 80% to arrive at the after-tax amount.
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