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Please I need a help in calculation of cost of capital. In one of bpp past questions (Patronic) . As per the question, On August 20X7 Patronic Purchased 18 million of a total of 24 million equity share in Sardonic, The acquisition was through a share exchange of two share in Patronic for every three in Sardonic. Both companies have shares with a par value of $1 each. The market price of Patronic’s share at 1 August 20×7 was $5.75 per a share. Patronic will pay in cash on 31 July 20X9 (two years after acquisition) $2.42 per acquired share of Sardonic. Partronic’c cost of capital is 10% per annum. The reserve of Sardonic on 1 April 20X7 were $69 million.”
My question is this: why is the cost of capital calculated as 18m x $2.42×1/1.21 = 36,000. Instead of 18m x 2.42 x1/1.1= 39600?
Thanks,
Ogo
Because you need to discount the 18 million for TWO years, not just one
Thanks Mike, could you please explain how they arrived at 1/1.21, because from my understanding, 10% x 2 years shld be 0.20, plus 1 =1/1.20.
@Ogoegbunam
Use discount factor 1/denominator, where denominator = (1+r) raised to the power of n. (r – rate, n – number of periods)
You’ll have: 1/(1+0.1) raised to the power of 2 = 1/1.21
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