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Sir it says that Avem Co, a UK-based company specialising in producing and servicing business jets, has approached Nahara Co with a proposal to acquire Fugae Co for $1,200 million. Nahara Co expects to receive a premium of at least 30% on the estimated equity value of Fugae Co, if it is sold.
My question is that i did adjust the premium that needs to be paid to nahara for calculating the additional value of the combined company but what about the 1200m purchase consideration don’t we have to adjust it?
No.
The new total value of the combined company is based only on the future earnings.
The only relevant of the premium to Nahara is to determine how the total gain is shared between the two sets of shareholders.
(Incidentally, you can find lectures working through the whole of this question linked from this page: https://opentuition.com/acca/afm/afm-revision-lectures/ )
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