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Hi John,
1.
In (c)(i) they have calculated the Total corporate value to be $1882.7m. This includes the value of equity+value of debt.
In an earlier para, they have told that Kawa Co, would retain the Loan notes B, which has a market value of $400m.
So I thought that the value attributable to equity is $1482.7m (1882.7-400).2.
I was able to get per share of Kawa Co to be $0.71per share.
In (c)(ii), they have found Kawa Co P/E to be 10.25(1200/117.1)(Total equity value/Pe ratio)
But I used the formula PE ratio = Value per share/EPS
I took the value per share to be 0.71 and EPS to be 0.06(117.1/2000), so I got the PE ratio to be 12.063.
In Opao Co (Dec 18), under cash offer the gain for Opao co (acquiring company) is calculated on (Additional value created – cash paid).Applying the same logic in this question, the additional value created is $651.1m and the cash payment to Kawa Co shareholders is $1320m, so doesn’t Lahla Co shareholders have a negative growth in their shareholder value?
Please tell me where my understanding is wrong.
Thanks in advance.1. Although you would still get most of the marks doing what you have written, the reason it is wrong is that the question says “it is expected that Kawa will maintain its capital structure after the unbundling” (which will mean that if necessary they adjust the level of debt borrowing).
2. You would still get the marks for having done that.
3. No – $651.1 is the additional value created over and above the value of Kawa on its own.
Hi John, thanks for the quick reply
For my 3rd question, I don’t understand your reasoning, because the $651.1m is calculated by reducing the individual value of Lahla Co and Kawa Co from the combined company equity value.
The same is done in Opao Co (dec 18) where the additional value of $720m is calculated, then how is this $651.1m the additional value of Kawa Co only?
Kawa before the merger had an equity value of $1,200 and so ignoring any other benefits they would have had to pay $1,200 for it. Merging gives extra value of $651.1 on top of this and so paying $1,320 is not losing money for Lahla.
Could you similarly please break it down for Opao Co also(Dec 18), so that I can get a clear difference between the two cases.
Thanks in advance.
The difference in Opao is that the question specifies that it is a % of the additional value created that is allocated to the different shareholders (which is over and above what they are currently worth) and it asks for the % gain in the value for the shareholders.
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