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Dear John,
Could you please explain how part c) is done for this question? I understand the $144m for 30% premium and $ 240m for 50% premium. But I don’t understand how they are getting the cash amounts of $ 44m and $ 140m.
I’m trying to do the question using the total amounts as the per share figures complicate it for me a bit.
Thank you
Where are you finding the cash amounts you refer to??
I am looking at the original exam question and answer, and the question says that they have sufficient cash reserves only to pay the 30% premium and then asks what additional funds would be needed to pay the 50% premium.
So the examiners answer simply says that the extra cash needed is 240 – 144 = $96M (and then discusses how it may be financed). There is no mention of $44M or $140M.
I am referring to the BPP revision kit. It is mentioned (in part c) that if a 30% premium is offered, then Nuvola’s equity holders will expect $144m premium, and therefore the cash paid will be $44.
And if a 50% premium is offered, then Nuvola’s equity holders will expect $240m premium, and therefore the cash paid will be $140.
I had an issue with where the cash amounts ($44 and $140) are coming from.
I see what BPP have done, but I have no idea why they have done it because it isn’t asked for in the question (which is why the examiner has not done it in his answer). All the question asks for is the extra cash needed.
However, the current share price of Nuvola is 2.40 and there are currently 200m shares. If they get a 30% premium then they will get in total a premium of $144m or 144m/200m = $0.72 per existing share. Therefore they need to receive $3.12 per share.
They are getting 1 Makonis share for every 2 Nuvola shares. Since Makonis shares are currently $5.80, Nuvola are effectively getting 5.80/2 = $2.90 per share in shares, which means they get $3.12 – $2.90 = $0.22 in cash. Therefore the total cash to be paid is 200m x $0.22 = $44m
(it is similar workings for a 50% premium).
Obviously the price of share in Makonis will not stay at $5.80 after the acquisition and so these workings assume that Nuvolas shareholders base their decision on the current share price (they will not know in advance what will happen to the share price).
However, again, the question does not ask for these workings. The examiner did not do the workings in his answer and there were no marks allocated for them 🙂
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