Business Valuatio

The following information relates to two companies, Alpha plc and Beta plc Alpha plc Earnings after tax $210,000 P/E ratio 16 Beta plc Earnings after tax $900,000 P/E ratio 21 Beta plc’s management estimate that if they were to acquire Alpha plc they could save $100,000 annually after tax on administrative costs in running the new joint company. Additionally, they estimate that the P/E ratio of the new company would be 18. On the basis of these estimates, what is the maximum that the shareholders of Beta plc should pay for the entire share capital of Alpha plc? A $1.1m B $2.9m C $4.2m D $2.0m Solution: Value of Alpha and Beta combined (210 + 900 + 100) × 18 = 21,780 Value of Beta on its own 900 × 21= (18,900) ––––––– Maximum value of Alpha= 2,880 Why are we calculating the value of the joint company when they've asked to calculate the maximum the shareholders of Beta co should pay for the entire share capital of ALPHA CO??