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For the above mentioned question, for three marks, I am facing a lot of problems.
I got the value of equity of Fodder at 36M and given we need to pay a premium of 25%, then we shall pay 1.25*36M = 45M + 4 M (debt that needs to be paid for Fodder pre acquisition) so in total we need to pay a price of 49M and then the question says that we already have $20M cash reserves so $49M – $20M = $29M is the additional debt that needs to be raised.
How comes the examiners’s answer is getting additional debt of $4.5M? He is looking at something of changes in debt capacity and this I don’t understand. It is very confusing.
Is $29M an acceptable answer given the question is only worth 3 marks? I mean he says that there will be an increase of $24.5M in the debt capacity but this is based on the assumption that Pursuit’s own debt worth $70M pre acquisition will be made free. I just don’t get it.
You are correct that $29M needs to be raised.
The rest of the answer is looking to see whether they actually will be able to raise that much debt. He is saying that if they keep their existing gearing ratio then they will only be able to raise about $24.5M from debt and so they would not be able to keep to the existing gearing ratio.
If you didn’t mention this last bit then I am pretty sure that you would still get 2 marks, so it is not so important 🙂
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