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sir can u pls explain how is thp co SH experiencing a gain of 4.62-4.48 in part c
I mean CRX would be gaining 0.14 per share right can u pleeeaaase explain?The TERP (as calculated in part (b) of the answer) is $4.56 per share, but needs reducing because of the issue costs and so gives $4.48 per share.
However, as I explain in my lectures, this would be the price at which shareholders make no gain and no loss and takes no account of how the money raised is being invested. If shareholders think it is being invested will (as is usually the case), then the price will end up being higher.
When shareholder become aware of the expected future earnings (thanks to the acquisition) then a PE valuation gives a new share price of $4.62. Hence they make a gain of 4.62 – 4.48 = $0.14 per share.
This is the gain to the shareholders of THP (not CRX). The gain made by shareholders of CRX is not asked for and is impossible to calculate without more information. It is irrelevant anyway because the new values of THP’s shares depends only on their expectation of future earnings as a result of the acquisition.
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