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Hi Mr John
May you please explain the logic of share price calculation in case we have share for share exchange.
Question Sigra Co – here when we have share for share exchange , in the question we can find the current price of share for Sigra Co, which is not used to calculate share value in case of share exchange . new share price is calculated based on ONLY profit of singro co plus synergy ( not clear why Dentro co PAT ignored?).
Question Hav Co – in this question also we have share for share exchange and we again have current share price for Hav Co. in this question there is no new share price calculation based on combined company, instead current share price of Hav co is used.
may you please compare the 2 methods used in these question and advise, in case of share for share exchange new share price should be calculated based on combined company equity value divided by combined company share number ( which is done in many questions) – or how we can know in which case to take current share price in which case we need to calculate .
Thank you
In this sort of question it depends on whether we are considering the acquiring company or the shareholders of the company being acquired.
The purchasing company has access to the information needed to be able to estimate the new market value of the ‘enlarged’ company and so will use the new MV when considering what to do.
The shareholders of the company being acquired will not have access to the information and so will use the existing MV of the acquiring company when considering whether or not to accept the offer.
Thank you Mr John,
Could you please advise what we have in these 2 questions and what is the difference of calculation.
In neither of these two questions does the examiner make it clear as to which sets of shareholder is being considered.
However in Sigra, it really has to be using the new market value of Sigra after the takeover because it is only part (a) that involves calculations and given that it carries 16 marks the examiner must have expected you to use the new market value otherwise it would have been too quick. In addition, it would mean that the last paragraph of the question would be completely irrelevant. If you had used the old market value then you would still have got marks, but certainly not the full 16 marks.
With regard to Hav, the examiner made it clear (as is noted in the BPP Revision Kit answer if you are using the BPP Kit), you would have got full marks if you had used either the new market value of the old market value.
If it happens in your exam and if it is not made clear (although I think these days it will be made more clear) then take account of the marks available but also (as always in AFM questions) state what you are assuming. Then you will certainly get the needed 50% of the marks even if the examiner was expecting you to do it the other way.
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