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march/june 2021 chakula co. Impact on Capital Structure Q

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › march/june 2021 chakula co. Impact on Capital Structure Q

  • This topic has 3 replies, 2 voices, and was last updated 8 months ago by John Moffat.
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  • June 1, 2022 at 2:23 pm #657072
    druscilla
    Member
    • Topics: 2
    • Replies: 3
    • ☆

    For combined co, Cash payment through debt borrowing the MVe is 2,933.7m, and the combined co, share-for-share exchange MVe is 4,253.7m.
    How does one get these figures?

    June 1, 2022 at 4:01 pm #657087
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51576
    • ☆☆☆☆☆

    $4,253.7m is the total equity value of the combined company (which was calculated using the PE ratio as shown earlier in appendix 3).

    Under the cash offer, Chakula’s shareholders receive $0.66 per share from the sale of Kawa, which is $1,320, in total.

    Therefore Lahla’s shareholder value is the difference of 4,253.7 – 1,320 = $2,933.7m.

    June 3, 2022 at 9:42 am #657208
    druscilla
    Member
    • Topics: 2
    • Replies: 3
    • ☆

    Thank you I understood.

    On the same question of Chakula Co, part (i) estimate the value of each Kawa Co share if it is a demerger. We use 75% to find the value attributable to equity. Where do we get that?

    I thought one could deduct the Mv of debt attributed to Kawa Co i.e. $400m to find the value attributable to Equity.

    June 3, 2022 at 4:14 pm #657272
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51576
    • ☆☆☆☆☆

    The question says that Kawa will maintain its capital structure after the unbundling.

    Currently the equity is 24.5% x 2,000 x $2.45 = $1,200.
    The loan notes B have a market value of $400.

    Therefore the equity is 1,200 / 1,600 = 75% of the total.

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