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Part (b)
Pre-acquisition valuations
Kerrin Co number of shares = 375m/0·5 = 750m
Kerrin Co market value = 750m x $5·28 = $3,960m
>>>>(((((((Future maintainable earnings (FME) = ($381·9) x 0·8 = $305·5m )))))))<<<<
Price earnings (PE) ratio = $3,960m/$305·5m = 12·96Question ) What is the meaning of FME? Can I just say PAT like we learnt in the lecture?
Thank you very much
Future maintainable earnings is the same as PAT. What you call it in the exam is irrelevant 🙂
Evening john. Just out of curiosity as i’m not able to fully understand the reason behind of the calculations. Hope u don’t mind to explain to me the reasons and logic behind it so that i wouldn’t be confuse anymore.
1) Part b, On share exchange basis, why do we have to use the additional value created (different between value of combined company and both individual company) instead of combined company value, to deduct the premium so that we can arrive at post merger valuation?
2) Another problem is the answer scheme. There is “share exchange calculation” part (SEC) and towards the end there is “impact on shareholder” part (IOS). As u can see, it already stated in the SEC part about the pre acquisition value and post merger value. cant we just use that value to identify the percentage gain in SHH? for example, Kerrin co, on the SEC part, the gain should be 2% ((4041.2/3960)-1) but in the IOS part, the answer is 1.7%.. Is the 2% figure acceptable or totally wrong?
I hope u can rectify my problem and wish u could explained further. Thankyou for your time and stay safe! wish u well
1. The shareholders in Danton want a 30% premium on the value of their existing shares and so the need to get shares in the combined company that are worth 1,920.5 (giving them a premium of 443.2).
We know that the total gain resulting from the takeover is 524.4, and this gain is shared between the existing shareholders of Kerrin and the shareholders in Danton.
So the total post-acquisition value of all shares in Kerrin must be 3960 + 1477.3 + 524.4 = 5961.7. All the shares existing after the takeover (the existing shares in Kerrin plus the new shares issued to Danton’s shareholders) must obviously have the same MV per share, so knowing how much each ‘block’ of shareholders must end up being worth determines the number of new shares issued and hence the share-for-share ratio needed.
2. Yes, the 2% would be acceptable. The difference arises because the 18 shares for every 7 is only approximate. The examiner has used this ratio in arriving at the 1.7% and the difference is due to the rounding (because it isn’t exactly 18 shares for every 7 🙂 )
Please explain
1.Where does the figure 524.4 come from (in your above answer) ?
2. Where the figure 356.4 million shares need to be offered to Danton come from ( in the examiner answer)?
3. Where does the figures 1110 in the calculation of post acquisition value come from ( in the examiner answer)?
Thank you
1. The working appear as the last line under the heading ‘Post-acquisition valuations’ in the answer. (“value created based on synergies”)
2. See my reply to the following post:
https://opentuition.com/topic/free-lecture-on-share-for-share-exchange-calculation/3. See the working in the second line under the heading “Advice on terms of share-for-share offer”. There are 750m existing Kerrin shares plus 350m new Kerrin shares issued to Danton shareholders. 750 + 350 = 1,110.
I do not have the original question and answer of Kerrin question in Sep/ Dec 2019.
I only have BPP Revision Kit for exam Sep23 onwards. May be the question and answer was amended, hence I can not search the working you said in 1 &3
3. Please check 350 or 360m new Kerrin shares issued to Danto shareholder?
750 + 350 = 1100 , not 1110360m is round of 140m *2.57 ?
Why total post ac’ value of Kerin and Danto = 4028.2+1917.4 = 5945.6, which is not equal to 5.931.7 ?
Thank you.
It is 360m new Kerrin shares issued – sorry, it was my typing mistake.
Yes 360 is 140 x 2.57 with rounding.
I am afraid that I don’t recognise the other figures you mention – I only have the original examiners exam question and answer.
Logically, can I understand that total post ac’ value of Kerin and Danto in case of share exchange for share is the same with cash offer ?
If so, I can understand that the difference in my above question is only due to rounding.
Hi John,
If share exchange amounts to 2.55:1- where is the 18:7 coming from?
I understand 18/7 = 2.55 approx.
How is the 18:7 being calculated?
Thanks
Giving 18 new shares for every 7 existing shares is the same as giving 2.55 new shares for every 1 existing share (for the reason you have stated).
It is just nicer stating it as 18 for 7 (because they are whole numbers rather than fractions of shares), although it is not essential to state it that way in the exam.
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