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On 1 August 07 Patronic purchased 18 million of a total of 24 million equity shares in Sardonic.
Apart from a share exchange, Patronic will also pay in cash on 31 July 2009 (2 yrs after aquisition) $2.42 per acquired share of Sardonic. Patronic’s cost of Capital is 10% per annum.
In the answer section, Deferred Consideration is calculated as:
18m x $2.42 x 1/1.21 (10% over 2 years)
I do not understand this way of working out. Why is it 1.21???? Shouldnt it be 1.1? (10%)
The way it explains it it looks like 21% is the Cost of Capital.
Please help. Thanks.
it s 1/(1.1)^2 = 1/1.21
the formula is 1/(1+r)^n
where,
r is the cost of capital & n is the number of years.
here, the payment will be after 2 yrs. so, n=2.
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