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.
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Question b)i) finds value of nente co using FCF method and in b)ii) they value nente co using PE ratio.
FCF method = 6971
PE method = 15×620=9300My synergy calculation has changed due to this and gain to Meji co shareholder has therefore changed. But it appears that question finds gain to meji co shareholder base on FCF method.
Is it fine to use PE for question b)ii)?
I assume you mean (a)(i) and (a)(ii) (unless you are looking at amended version of the question somewhere).
Part (a)(i) specifically asks you to use the free cash flow method and that is what the examiners answer has done.
For (a)(ii) the examiner does use the PE method (and this is the only way that it can be done given the information in the question).
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Thank you for your reply sir.
When PE is used, the gain is totally changed. Cash offer for example,
Value of combined co = (3200+620+150)x15=59550
Value of meji = 48000
Nente co = 620×15 = 9300
Synergy = 2250
Premium paid per share 2.95-290=0.05
Total premium paid = 0.05×2400=120
Thus gain to meji = 2250-120= 2130.Is this acceptable? Isnt this right method?
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