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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Chakula – Mar/Jun 2021 past paper
Part c)ii) Solution
MV of equity under cash offer $2933.7m
MV of equity under share-for-share offer $4253.7m
Please explain how to arrive at the above answers.
The equity value of the combined company is $4,253.7m (using a PE valuation as shown in Appendix 3.
If a cash offer then Lahla has to pay $1,329m to Kawa’s shareholders, which leaves 4253.7 – 1320 = $2933.7m as the value of Lahla’s shares.
If instead there is a share-for-share offer then no cash is paid out (just more shares issued) and therefore the total value of the shares is the full $4,253.7m.
Is the thinking behind the $2933.7m a “free cash flow to equity” basis, rather than a double entry basis?
No, not at all.
Based on the future earnings, the equity is worth 4253.7. However having to pay out cash of 1,320 reduces the value of the company.