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BPP Practice and Revision Kit – question 23 Markonis

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › BPP Practice and Revision Kit – question 23 Markonis

  • This topic has 5 replies, 2 voices, and was last updated 2 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • September 2, 2022 at 7:55 am #664908
    julianleong
    Participant
    • Topics: 12
    • Replies: 18
    • ☆

    Part b asked for the impact on shareholders’ wealth using 50% premium over Nuvola equity value.

    The answer uses a straightforward Nuvola’s current equity value * 150% to get the price to be paid, which is 480 * 1.5 = 720. The rest of the answers follow from here to get the cash payable.

    However, I tried to get Nuvola’s new value of the share equity in the combined group (to get the cash payable after deducting the purchase price with the share value) and found some problems.

    As it is a mixed share-4-share (1 for 2) and cash proposal, the additional share added is 100m.
    New share price is: combined equity value / New total shares number / $2.2b / 310m = $7.10

    Based on the new shares that Nuvola will have in the combined group, the share value is already $710 ($7.10 share price * 100m shares). This is already close to the purchase price. If using 30% premium to calculate purchase price, it will be lower than $710.

    Is my understanding wrong?

    Thanks John.

    September 2, 2022 at 9:12 am #664916
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54696
    • ☆☆☆☆☆

    The part where you are wrong is that the more cash is paid out as part of the acquisition, then the lower the value of the combined company (and therefore the value per share).

    September 2, 2022 at 4:15 pm #664956
    julianleong
    Participant
    • Topics: 12
    • Replies: 18
    • ☆

    I see.

    So in a more normal direct question, say:

    Initial combined value is $2,200
    Cash payment is fixed at $200
    New combined value is $2,000 (2200 – 200)

    No. of shares 1,000
    Share price $2 ($2,000 new combine value / 1000 shares)

    Payment by shares $400 (200 shares * $2)
    Total payment $600 ($200 cash payment + $400 shares payment)

    Is this understanding correct?

    September 2, 2022 at 5:22 pm #664970
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54696
    • ☆☆☆☆☆

    Yes – it looks to be correct 🙂

    September 3, 2022 at 2:02 pm #665033
    julianleong
    Participant
    • Topics: 12
    • Replies: 18
    • ☆

    Thanks John.

    This is a very important clarification.

    September 4, 2022 at 7:45 am #665075
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54696
    • ☆☆☆☆☆

    You are welcome 🙂

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Viewing 6 posts - 1 through 6 (of 6 total)
  • The topic ‘BPP Practice and Revision Kit – question 23 Markonis’ is closed to new replies.

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