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A very good very early morning….:)
i have a series of questions on this and i have gone thru the previous years’ posts and read ur explanations as well so i will try an keep it to a minimum.
first … the word premium. what does it mean? because when i think of premium, i think of a DIFFERENCE, for example the market premium in CAPM is rm-rf.
the reason i am asking is that in part (b), i had the figures calculated but i deducted the share capital of 300m from the answer I got.
here it seems ‘premium’ is just another word for the company valuation.
regards
Premium is the extra.
The biggest premium they can afford to pay is the difference between the new value of the combined company and the total of the current individual values of the two companies.
The nominal value of the share capital is of no relevance. The premium is the extra they could pay over and above the current market value. If they simply paid the current market value then there would be no premium.
I went back to part (b) and indeed these are differences, so thats a relief!
sticking to (b), we calculate the premiums to be [note: my numbers are slightly different]
i) 2273 – strand’s suggestion
ii) 1703 – hav’s suggestionjust as practice, the question cd have asked to compute the percentage premiums here as well, right? which wd have been
i) 2273/5730 = approx 39%
ii) 1703/5730 = approx 29%where 5730 = p/e x pat of strand in x3 (pre acq).
if u r ok with the above ‘extrapolation’, my questions are:
1. can the above percentages be called “gain in Strand shares”?
2. if a question asks for ‘gains’ on a share, thats just another way of calculating the premium?thank u
thank u. and i have 2 questions remaining…
1. in parts (b) and (c) we are in a way calculating gains/premiums so essentially b and c are asking for the same thing – except that [b] is termed as a valuation question and [c] makes us ‘value’ the different types of ‘offers’ that are being made.
regards
I am away for the weekend now and so I don’t have access to the question. I will answer you on Tuesday when I get home.
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