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Hello mr John , my question is related to Doric Co ( pilot paper) no 47 in bbp exam kit
I thought depreciation was a non cash item and should be added back but since there was a note saying that deprecation is equal to the amount that would be needed to maintain the current level of activity, this would cancel out so no adjustment required.
But in the proposed answer, they did remove depreciation from operating profit, can you explain why please?quick question regarding Hav co no 45, are we supposed to get the same percentage premium if we use post acquisition share price rather than the method used in the solution>?>
With regard to Doric, the answer starts with the profit before depreciation. They did then subtract depreciation but only because it is the same as the amount needed to maintain activity (and of course for the calculation of tax.
With regard to Hav, you will have to tell me which exam it was in (I am afraid I cant remember the names of every question, and I do not have the BPP kit).
Ahh now i understand why they subtracted the amount but they should have labelled it additional investment and not depreciation.. Thank you
Regarding the Hav co question its June 2013 no 2 (c) cash offer and share offer
I am not getting the same answer as proposed in the solution.This is what i did
Combined company value = ($1,584m + $317·6m + $140·0m) x 14·5 = $29,603·2m
Market share price of Combine Co after acquisition =$29,603·2m/3000 shares= $9.88 per share
Market share value of Strand Co=4.77
Total premium = 9.88 + 1.33= $11.21
Shareholders of strand are receiving 1 share of hav co for every 2 so the value of 2 strand co shares = 4.77 x 2= $9.54 for 2 shares
Excess return = $11.21- $9.54 = $1.67
in % = ( 1.67/9.54) x 100 = 17.5 %The proposed answer is 25·0%
Do you know what i did wrong?
A few things:
First you have used the new value per share of 9.88, whereas the examiner has used the old value of 9.24. Using the new value is actually more sensible, and would have got full marks.
Secondly, however, you then get all confused.
The shareholders of strand get 1 share in Hav for every 2 shares. So for every share they get 1/2 a share worth (on your figure) 9.88/2 = 4.94
In addition they get 1.33 in cash.
So in total they get 4.94 + 1.33 = 6.27.The current value per share is 4.76 (you have used Hav’s value), so and increase of 6.27 – 4.76 = 1.51. Or in percent terms, 1.51/4.76 = 31.7%
A few things:
First you have used the new value per share of 9.88, whereas the examiner has used the old value of 9.24. Using the new value is actually more sensible, and would have got full marks.
Secondly, however, you then get all confused.
The shareholders of strand get 1 share in Hav for every 2 shares. So for every share they get 1/2 a share worth (on your figure) 9.88/2 = 4.94
In addition they get 1.33 in cash.
So in total they get 4.94 + 1.33 = 6.27.The current value per share is 4.76 (you have used Hav’s value), so and increase of 6.27 – 4.76 = 1.51. Or in percent terms, 1.51/4.76 = 31.7%
So based on this , i guess the cash and share offer becomes the preferred option by shareholders of stand co since it maximizes their return.
Thx mr john
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