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In the calculation of second option- share for share plus cash offer
Why are we taking the old value of Hav co per share and not the the combined company’s per share value, the shareholders will get the new share of hav co which are combined value 29603/600+2400Also in the same que please explain how they have calculated the convertible value, why haven’t we compared any redemption value?
Hav’s share price will increase after the acquisition based on the information given. However although Hav knows this (they, for example, are able to estimate the synergy benefits).
However Stand’s shareholders will not have access to that information. So when deciding which of the options they prefer (which is what part (c) is asking, then will be basing their decision using the current value of the shares that they are being offered. (If you used the new value instead, you could still get decent marks – but not all of them! – because if you look at the marking scheme you will see that half the marks are for justifying and explaining what you have done).
With regard to the bonds, the offer is $100 bond for every $5 nominal value of shares. Since the nominal value of the shares is $0.25 per share, they are being offered a $100 bond for every 20 shares that they currently own, which is 100/20 = $5 per share.
As the answer goes on to state, the market value of the bonds will probably be higher (and will increase over time) because instead of redeeming for $100 they will (if they want) be able to convert to 12 shares in 6 years time, and the market value of 12 shares in 6 years time is likely to be higher than $100 (obviously if it isn’t then they won’t convert but will just take the $100). However we do not have enough information to be able to calculate this. It just needs stating that the fact that the market value will probably increase is an additional attraction of taking the bonds.
Then in que Sigra co (dec 12 adapted) in this same share for share exchange was to be calculated but in this the combined company’s per share value is taken in method 2.
Yes, because this question is not asking for the reaction of Dentro’s shareholders.
(Also, look at the marks available for part (a) which indicates the examiner is expecting more workings than for Hav Co which carried much fewer marks.)
Sir I didn’t understand, in both the questions we were asked to give their reaction and their percentage gain, so how can we assume in one that the shareholder won’t know about the synergy and will accept the old company value and in one that new company value is taken.
In Sigra the question just asks what the % gain on a Dentro share will be.. There is no mention of the reaction of Dentro’s shareholders to each of the payment methods.
In Hav, the question specifically asks which payment method will be most acceptable to shareholders of Strand.
If it is not clear in the exam, then as always make sure you state your assumptions. The marks in Paper AFM are not for getting the ‘correct’ answer – there is rarely just one ‘correct’ answer because it depends on assumptions.
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