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In the answer it is mentioned that:
“A lot will depend on how much (if any) surplus shareholder value is generated and how it is distributed. Market gearing is likely to increase if the majority of the benefits fall to PetroFrancais’ shareholders; the reverse will be the case if Burcolene’s shareholders enjoy the bulk of the benefits. The implications for the cost of capital will depend on the bid price and the way in which the acquisition value is distributed amongst the two groups of shareholders ”
1.How does the distribution of benefit affect the Market Gearing?
2.How does the bid and the distribution affect the cost of capital?
Thanks for all your help. 🙂
The benefit goes to shareholders by increasing the market value of the shares. If the market value of the shares increases then market gearing falls.
The effect on the market value depends on how the benefit is shared between the companies, and it is the money paid that determines what the benefit is.
If gearing changes (due to the market value of the shares changing) then this will affect the WACC.
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