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Sir,
1) regarding b) the share price was based on Louieed’s before acquisition price. Shouldnt we value it base on the combined company’s value? Just like how it was treated in Nente co (jun/12)?
It is the combined co’s share that Tidded co share holder will get.2) for b) i calculated combined co’s value by adding after tax earnings of both company and 20m synergy. Then muliplied by post acquition PE ratio which is 14. Is this legit method?
Can this be applied to other question if debt part and cash part was not involved?Thank you so much sir.
1. It really depends from whose point of view we are looking. As far as the shareholders of the company being acquired are concerned, they will not know what the effect on the share price will be and so they will base decisions on the current share price of the acquiring company.
However, as far as the acquiring company is concerned they will know what the expected future earnings are after the acquisition (and therefore the likely share price) and they will base what they offer on the new share price.
Sometimes it is not clear from the question from which view point it is, so make sure you state your assumption and then you will get the marks.2. It is a legitimate method (and is common in real life). It is not so common in the exam but in this question the information did rather push you into this approach 🙂
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Thank you so much sir
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