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Hi,
May be a silly question, however I need to straighten it out in my head, so apologies in advance.My understanding is that, when calculating a share exchange, you calculate the combined companies share price which is then used in the calculation to identify the increase in share price for the target company/predator company. I would assume this would be the same when calculating the PE ratio?
In part 1b, when calculating the share exchange, the answer uses the current share price of the predator company (Louieed co.) in the calculation, rather than the combined companies share price.
Please would it be possible for you to advise why this is?
Regards
It all depends from whose point of you we are looking.
The predator company will know the new likely share price and will use this when deciding how much to offer.
Shareholders of the company being taken over will not have the information and so will base their decision on the current share price.
If it is not clear in the question which way to look at it then state your assumption and you will still get the marks.
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