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Dear sir, i have a few questions regarding the calculation on the gain in value of companies after acquisiton.
1. D’12 Q3(a)
For bond offer, the rate of return is calculated as:
$104 = $6 x (1 + r)–1 + $6 x (1 + r)–2 + $106 x (1 + r)–3
If r is 5%, price is $102·72
If r is 4%, price is $105·55
r is approximately = 4% + (105·55 – 104)/(105·55 – 102·72) x 1% = 4·55%Why did they minus the market price of $104 on the top? because if i were to use the usual IRR method i would have done it as: 4% + 105.55/(105.55-102.72) x 1%..
Also, can i simply use the par value of $100 of the bond to work out the answer instead of using the market price? Because for J’13 Q3(c) the convertible bond’s par value is used, without having to work out the market price of the bond.
2. D’18 Q1(b ii)
under mixed offer, the questions stated that the Opao Co’s share price will become $2.60, so the answer for gain in Tai (target) is calculated using the price of $2.6. however, why can’t the gain in Opao’s share value simply be calculated as $2.60/2.5 -1??Another question is, can i calculate the gain in acquirer’s value as:
no. of shares = 2000 + 263 =2263m
Post acquisition total share price (combined share price) = 6720 – (2.09 x 263) =6170.3m
Value of each share price, Opao co = 6170.3/2263 = $2.73
Gain in share price = $2.73/$2.5 – 1 = 9.1% ??What you have written as ‘the usual IRR method’ is certainly not the usual method and would give a ridiculous answer.
The normal method is to calculate the NPV at the two rates.
The NPV at 5% is 102.72 – 104 = – 1.28; the NPV at 4% is 105.55 – 104 = 1.55So the IRR is 4% + 1.55/(1.28 + 1.55) = 4.55%
And no – you cannot use the par value (J13 question is a different situation).
It may help you to watch my free lectures on the valuation of debt and on the cost of debt.
I think i’ve got it now!
Do you mind answering my second question above?
Thank you. 🙂
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