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in this question the while calculating the percentage gain for the aquiring company i,e Mije co,,,
it calculated as
Eps of the acquired company + synergy gain= 620000+150000=770000
no of share after acquisition = 10m
increase in eps= 7.7 cents
so increase in SHare price = p/e ratio * 7.7= 1.16
(current Mp)4.8+1.16-{2.95*2400000( cash consideration)}/10m=5.25
Percentage gain = (5.25-4.8)/4.8
= 9.4%
so why Eps has been included in percentage gain calculation,,,
dont we use change in wealth using Mv of new company to old company for Examplae
In this case
CUrrent Mv of Mije = 10mshare * 4.8= 48m
curretn m v of nente = 6.971 calculated using FCFto firm
Synergy = 0.15
M V of combine = 55.121
Less cash consideration(2400000* 2.95)= 7.08m
New M V Of Combine =48.041
New Number of share = 10 m
new mv per share=4.8041
gain -41c/480c=.08%
why eps is include and do we have to calculate the percentage gain including the eps of victim company always? what should we do it exam ???The synergy is 0.15 per year – not just a ‘one-off’, and there is also the addition benefit that Nente will operate on a higher PE ratio.
Given that the question mentioned the PE’s and that Nente will be operated on a PE of 15, then that is how the value needs to be calculated. The EPS is relevant because the MV is the EPS x the PE.
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