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On 01 July 2022, X Ltd acquired 551,260 ordinary shares of Y, that is, X Ltd holds 70% shares in Y Ltd. The purchase consideration was as follows:
?Cash paid $ 960,000
?A deferred cash settlement to be paid in three years’ time of $ 470,000
?By an exchange of one share in X Ltd for every four shares in Y Ltd. The market price of x Ltd share at the date of acquisition was $ 2.95 and the market price of y Ltd share at the date of acquisition was $ 3.15
Legal fees associated with the acquisition were $ 10,600.
The discount rate of X Ltd is 10 %.Can you please help me out with this question please? for calculating the cost of investment
Here are my workings:Cost of investment
Cash $960,000
Deffered cash 1/1.1^3*470,000
Share for share 70%*1/4*551,260*2.95.Is my calculation good?
My issue is that sometimes the share needs to be multiplied by the % holding of the parent and sometimes not, and for the legal fees is not included right?
Hi,
Your calculation of the share exchange does not need to incorporate the percentage holding of 70%. The number of shares acquired of 551,260 is what has given us the 70% holding and so we just need to use the 551,260 figure to work out how many shares in the parent were issued. You’ve done this correctly using the 1/4 and the $2.95 share price of X shares.
Thanks
thank you and concerning the deffered cash is it good?
and how to identify whether we have to multiply by the % of holding or not.(concerning the shares)Yes, your deferred consideration calculation looks correct too.
Regarding whether you have to multiply by the % holding depends upon how the question is phrased when looking to calculate the number of S shares acquired. If you are given the number of S shares acquired then you don’t need to use the % holding as this number of shares equates to the % held, as in the example above. If you are given the total number of shares in issue in the subsidiary, say 100,000 and we own 70% then you would need to look use the 70% holding to work out the number of S shares acquired, i.e. 70% x 100,000 giving 70,000 S shares acquired.
Thanks
Can you explain why we take the market price of the parent when calculating the share exchange rather than for the subsidiary market price please?
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