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Dear John,
I have a question about the calculation of the value gain in the share price for Nente Co in Question part (ii): (ii) Estimates the percentage gain in value to a Nente Co share and a Mije Co share under each payment offer.
I do not understand why we take Mije’s share price of USD 5.13 AFTER the merger to calculate Nente’s gain. I thought we have to take Mije’s share price before the merger of USD 4.80. I would have calculated Nente’s gain as follows:
Value of Nente’s share implied in the share for share offer:
4.80/3*2 = USD 3.20.
Gain = (3.20-2.90 (Nente’s current share price) )/2.90 = 10.34%.In order to calculate a share value gain for the target, which share price do I take as basis??
Thank you very much in advance.
It depends on whether you are looking at it from the point of view of the acquiring company (who will be able to estimate what the new share price will be), or from the point of view of the shareholders in the company being acquired (because they will not have the information and so will be deciding based on the current share price).
If it is not clear from the question as to which viewpoint to take, then state your assumption and you will still get the marks.
Dear John,
Thank you very much. I understand.
So using 4.80 USD would be the viewpoint of the target, and by using 5.13 USD I would take the viewpoint of the acquirer.However, I am still a bit uncertain how to approach such a question in the exam (apart from stating own assumptions in the worst case). In the Louieed (Mar/Jun 16) question (b), for instance, they asked for the effect on the target’s P/E ratio, and in the solution they took tha acquirer’s current share price. That is why I followed the same approach in the Nente question, which was obviously not the proposed solution.
What you wrote at the beginning is correct.
Do appreciate that there is rarely just one correct answer to AFM questions – it depends on your assumptions, which is why it is so important to always state your assumptions.
If it is not clear in the question, then you would still get the marks. (Even if it was clear from the question but you had missed it, then by stating your assumption you would not lose all the marks either 🙂 )
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