Doubler Inc. Kaplan Kit Qn 45 (c)

Hi, I have been working through Qn 45 Kaplan Kit; Doubler Inc (June 2007). The model answer states; " ... when this (redundancy costs) is included the combined value of the company is still expected to substantially increase." However, my calculation of the combined company value when redundancy cost is included using the P/E valuation method comes to $168,459. Comparing this with pre-acquisition value of $170,000 shows a reduction in value by $1,541. Please advise. Facts of the question (only relevant figures are included): Doubler Inc is considering a takeover bid for Fader Inc. The Board of Directors have issued the following statement; “Our superior P/E ratio and synergistic effect of the acquisition will lead to post acquisition increase in earnings per share and in the combined market value of the companies”. Doubler Inc Fader Inc $’000 $’000 Profit before tax 6,300 4,100 Tax (1,890) (1,230) Profit after tax 4,410 2,870 Ordinary Shares (10 cent par value) 4,000 3,000 Notes: i. After tax saving in operating costs of $750,000 per year indefinitely are expected as a result of the acquisition ii. Initial redundancy costs will be $1 million before tax; iii. Doubler’s cost of capital is 12% iv. Current share prices are: Doubler 290 cents, Fader 180 cents; v. The proposed terms of takeover are payment of 2 Doubler shares for every 3 Fader shares. REQUIRED c) Estimate the effect on combined market value as a result of the takeover using: i. P/E based valuation ii. Cash flow based valuation State clearly any assumption that you make. (5 marks)