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Sir when calculating the additional value for Avem co , 1200 mil the cost to aquire is not subtracted from. just the premium why is that
You can find a lecture working through the whole of this question here:
https://opentuition.com/acca/afm/afm-revision-lectures/It should answer your question (but if not then do ask again 🙂 )
Sir, I did go through the revision lecture and I am still not able to understand it
It is because we are calculating the added value.
Suppose company A has dividends of 100 a year, and a value of 1,000. Company B has dividends of 200 a year and a value of 2,000. (So the PE ratio for both is 10).
If B takes over A and there is no synergy and no change in PE’s, then B will have a dividend of 300 a year and a value of 3,000.
So if B did not have to pay anything for A, the shareholder of B would make a gain of 1,000.
If, however, they had to pay 1,000 for A, then the shareholders of B would end up making no gain (so no added value).If however the new total dividends were 350 (due to synergy) then the new total value would be 3,500 and share shareholders of B would make a gain of 500 (or 3,500 – (1000 + 2000))
The added value would be 500.It is the same in this question except that some of the gain is given to the company they are buying from which means less added value for the shareholders of B.
I hope that helps 🙂
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