BPP Practice and Revision Kit – question 23 Markonis

Jjulianleong3y ago

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.

John MoffatTutor3y ago#1

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).

Jjulianleong3y ago#2

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?

John MoffatTutor3y ago#3

Yes - it looks to be correct :-)

Jjulianleong3y ago#4

Thanks John. This is a very important clarification.

John MoffatTutor3y ago#5

You are welcome :-)

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