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Good day,
In 1question of June 2011 past exam paper it says “Pursuit Co estimates that a payment of equity value plus 25% premium would be sufficient to secure the purchase of Fodder Co.”The answer for premium calculation is 0.25*36,086,000=9,022,000.
Can you please advise how to come up with these 36,086,000 figure?
Thank you.The MV of Fodder (based on free cash flows) is 40095
Fodder as debt:equity ratio of 10:90 (from the question).
Therefore the value of the equity = 90% x 40095 = 36086
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Hi John,
I do not understand clearly about above info too. It’s given “Pursuit Co estimates that a payment of equity value plus 25% premium would be sufficient to secure the purchase of Fodder Co.”.
I think as following:
Payment for acquisition = Equity value x 1.25 = 45,107.
Equity value = 40,095 x 90% (less debt 10%).
Synergy benefit = 9,074
Net benefit = 9,074 – (45,107 – 40,095) = 4,062 only (examiner’s answer = 52,000)Please help me explain this.
Thanks.
Binh.The MV of the equity is 40,095 x 90% = 36,086.
The premium is therefore 25% x 36,086 = 9,022 (and so they are paying in total 36,086 + 9,022 = 45,108 (the 1 difference is rounding which is irrelevant) ).Therefore the net benefit = 9,074 – 9,022 = 52. (All the figures are in thousands, so it is 52,000.)
You have calculated the premium by taking the price paid for the equity less the value of the whole company instead of just the value of the equity, which is only 90%)
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