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Dear Tutor
the answer assume combined Co FME = FME A Co + FME B Co + synergy after tax, Can we apply this logic in other similar exam questions?
How do we know synergy mentioned in question should be allocate to FME or as whole? The synergy 20.5m allocated to FME, then synergy as whole 524.4m, which is much higher than 20.5. I am just confused as when I saw the question, I won’t be able to identify where 20.5 contribute to, unlike 2018Sep Q3, clearly says FCFE increase 5m
thanks
The difference between the new market value of the ‘enlarged’ company after the acquisition and the total of the current MV’s of the two companies is due to the synergy. We calculate the new MV of the ‘enlarged’ company in the normal way based on the future earnings of the enlarged company.
Here, the synergy is due to an extra $20.5M per year and it is because the earnings increase by $20.5M per year that the MV of the enlarged company increases by $524.4M.
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