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Hi Sir
I have the following questions:
1) in part a) it asks the additional equity value created. So shouldn’t we take into account the cash paid as premium?
that is,
Combined value = Value of Target + value of acquirer + additional value – cash paid as premium2) in part b) where it asks to calculate impact on makoni’s equity
shouldnt we calculate the drop as percentage of combined firms share value?
1. No. The total value of the business will be the PV of the free cash flows, and the total value of all the equity will be 60% of this. (The fact that some cash is paid ‘now’ does not affect the future cash flows and therefore the total value.)
2, No. It is asking for the impact on the value of the shares held by Makonis’s current shareholders.
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