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Hi Sir,
Got myself confused with the two techniques used in the revision kit.
Please be kind enough to clarify if I got right.The gain in MVe post acquisition is the additional value (max. premium payable).
In some questions we find the gain in the firm value (MVe + MVd) to find the additional value post acquisition. This gives the same answer provided the MVd remains the same before and after acquisition.Suppose the gearing has changed
Equity Value gain = Firm value gain – increase in debt (MVd)
or
Firm Value gain + decrease in debt (MVd)In most of the exam questions it’s the impact on MVe (Shareholder/ equity value) that we are ultimately concerned.
Whatever the gain to the firm is, that gain will all belong to the equity and so will be the gain to equity.
Suppose the firm has a MVe of 5m and Mvd of 3m pre-acquisition.
And after acquisition the MVe is 6m and Mvd is 4m.
Does this mean that the firm value gain is 2m but the equity value gain is only 1mThe target firm does not exist after the acquisition!
The gain is the post-acquisition value of the acquiring company less the total of the values of both companies before the acquisition.
Hi sir ,
I think I am not understood. Apologies
What I am trying to say is that the Equity value and Firm value are two different things.
The difference in the Firm value between post and pre-acquisition is the made up of the gain/loss in MVe and MVd.Therefore is it right to assume that “..Whatever the gain to the firm is, that gain will all belong to the equity and so will be the gain to equity.”
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