dec 2013 makonis company

What you have done is perfectly correct. The only difference in the examiners answer is that instead of dividing both by 310M to get the two share prices, and then looking at the difference, what he has done is looked at the total difference between the totals and then divided this by 310M. You would have got full marks for this part :-)

Thanks a ton

You are welcome :-)

Hi Sir pertaining to this qns I have 3 qns on this: 1. why does 50% premium reduces each share? can I take 0.50 premium x 480 minus 0.30 x 480, is this the premium that Makonis needs to pay? 2. for part A the additional equity created that we need to compute is this the value that might have earned in the future? 3. in the examiner answer for part A assumption: sensitivity analysis is used to determine how changes in the variables would impact on the value if the combined company (are we able to use sensitivity analysis to determine??)

And how do we determine Nuvola equity holders own 1/3 control of the combined company and Makonis own 2/3?

After combining, Nuvola shareholders takes up 100m shares in Makonis. Total shares in Makonis is 310m. So 100÷310 is 32% which is 1/3.

1. The premium is not based on the nominal value, but on the market value. 2. If the two companies merge then the new value of the equity is calculated from the PV of the new expected cash flows. The additional value is the extra of the new value over the existing. 3. All he is saying is that the result is only 'correct' on the assumption that all the figures used (for growth etc) are 'correct'. Although you are not asked to use sensitivity analysis he is simply saying that that would be a way of finding out how critical these assumptions are. (We don't know how big a difference it would make if (for example) the growth rate turns out to be different. Sensitivity analysis would give us an idea of this.)

haseenababu is correct with regard to your second question.

Can I ask a general question that's been bugging me please? From the comments above, it appears that Makonis has bought shares from the Nuvola shareholders, which makes sense to me because they are acquiring the company. But am I correct in saying that they are issuing new shares in Makinis to Nuvola shareholders? So the number of shares after the acquisition is 310? Sometimes I'm not sure if new shares are being issued, or whether they are swapping shares. Is it the word "acquire" which suggest that Makonis is issuing new shares? Many thanks.

Yes :-) Because the are acquiring Nuvola, the are issuing new shares and given them to the existing shareholder in Nuvola to replace their existing shares. (It still effectively means that Nuoval shareholders are swapping their shares as far as they are concerned, but not for existing shares in Makonis, but for new shares in Makonis.)

Thanks very much!

You are welcome :-)