Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Mergers and acquisitions
- This topic has 3 replies, 2 voices, and was last updated 5 days ago by John Moffat.
- AuthorPosts
- November 14, 2024 at 8:26 am #713226
Hellos sir! In business valuation involving a share for share exchange the technical article on business valuation valued the combined entity using “bootstrapping” it used bootstrapping in this case as using current P/E ratio of the acquiring company and applying that on the combined earnings of both companies to calculate the value of the combined entity. After that the issued capital of the acquiring company (including the new shares issued) is used to calculate the share price of post-acquisition entity.
I used this same method in Sigra Co (2012) But didn’t gave the correct answer. In that answer the examiner had used the current value of the acquiring company and the target company, added the synergy benefits and then divided them on the share capital of the acquiring company (including the new share issued) to calculate the value of the combined entity.
Now these two are completely different approaches and give completely different answers my first instinct was to think ok if I don’t have the value of the target, I can just use the PAT and the acquiring company’s P/E ratio to calculate the market value of the combined entity and if I have the equity value of the target ill use the second approach but after looking back at the article we had the equity value of the target company so I have no idea why the writer used the bootstrapping method.
can you please clarify which one should I use in the exam. Thank uNovember 15, 2024 at 8:11 am #713254It all depends on the wording of the question and of the information given.
In Sigra you are specifically told about the synergy benefits and no mention is made of the PE ratio. However in the article, there is no mention of synergy benefits but there is the indication about them having maintained their PE ratio.
(The situation in Sigra is much the more common in exam questions)
November 15, 2024 at 9:32 am #713256Yes sir, after attempting other questions I noticed the pattern. Thank u for the explanation.
November 16, 2024 at 8:02 am #713268You are welcome 🙂
- AuthorPosts
- The topic ‘Mergers and acquisitions’ is closed to new replies.