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Hi Sir,
Can you explain further the gain to Mije under the share to share offer?
What I’ve done is:
MV of combined company : 6971 (Answer from FCF part of question- Equity value of Nente Co)+ 150(Synergy)+48000(Value of Miji Company =4.8*10000) = 55121/-Total no of shares = Shares of Miji C/o + New shares issued as consideration (2/3*2400)
=10,000+1600 = 11600 sharesShare price of combined company = 55121/11600 = 4.75 /share
What is it that I am doing wrong here and what point am I missing as this is not the answer in the kit?
Although you would get some marks for what you are doing, there are two problems.
Firstly the synergy is 150 per year for the foreseeable future, and so the PV of it is a lot more than 150.
Secondly, the gearing is changing and so the cost of equity and the cost of capital will change. However the question does say that the PE ratio will stay at 15 and so we need to use that to get the new MV.
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