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Dear John sir,
Needed your inputs on this, a very unnerving sum.
in Makonis co. (dec 13) when premium offered is 30%, the remaining MV of combined co. is $2202m-$624m(incl. of share-for-share exchange and cash offer)=$1578m, and if we divide this by 210m pre-existing shares of Makonis shareholders, we get 1578/210=$7.51 MV per share post-acquisition.
On the other hand if we give 50% premium over Nuovola’s MV of equity, we are left with only 2202-720=$1482m, and if we divide this by 210m pre-existing shares of Makonis shareholders, we get 1482/210=$7.06 MV of per share. This is a difference of 7.51-7.06=$.45 per share. And as a percentage it shows a drop of .45/7.51=6% which is not equal to the right answer of 5.3%
Although you would get credit for what you have done, and get most of the marks, there is a flaw in your argument.
The total value of the shares after the acquisition (and hence the value per share) would reduce by the amount of cash that was paid to Nuvola. The problem is that the amount of cash paid to Nuvola will depend on the value of the shares that they are given – so the calculation would sort of go round in circles. I guess that it could be done using algebra but that would take far too long given there are only 5 marks 🙂
The new MV per share could certainly not be so high as to be over $7 because that would mean that Nuvola was being given shares worth over $3.50 per share (plus cash) which would certainly exceed a premium of 30% (and probably also exceed 50%) on the existing share price of Nuvola.(Although on your figures the last line of your post would be OK, appreciate that the 5.3% that the examiner calculates is not comparing the two premiums with each other but is expressing the different in the two new share prices as a % of the current share price.)
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