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normally the additional value created is calculated by:
Value of combined company less value of individual companies if i am not wrong.
so accordingly
Value of combined company is
post aq.earnings 3200+620+150
PE ratio is 15
so value of combined company is 3970*15=$59550
so additional benefit should be 59550 -current mv of mije co -current value of nente co.
am i correct john.
but i dont know why bpp kit is only substracting mije co value and cost of aquisition to find out the value added to mije co shareholders.this is for the cah offer by the way.
What am i missing?My thought process for the answer
Value of combined company = $59550
Current value of mije co 10m shares*4.8=$48000
Current value of nente co 2.4m shares*2.9=$6960
prrmium paid under cash offer $.05 per share=$120
So value added for mije co share holders =59550-48000-6960-120=4470
value per share 4470/10000=$.447
% gain .447/4.8=9.3%You are forgetting that some of the gain goes to Nente’s shareholders.
As far as the gain to Mije’s shareholders is concerned, it is the increase in the value of their company (due to the acquisition), less what they had to pay for Nente.
yes the premium $.05 per share is going to nente co shareholders under cash offer as currently nente co share price is $2.90 as we calculated it for part A.
my question is if i find the post aquisition share price for the combined company and compare it with current share price for the cash offer just like what bpp did for share offer in part ii why cant i calculate the percentage gain for mije co shareholders.
confused please helpIf it is a share for share offer, then the value of the ‘new’ Mije is higher but this is shared over a larger number of shares.
If it is a cash offer, then again the value of the ‘new’ Mije is higher (because of the higher earnings) but since Mije has had to pay out cash, then that makes the value of the ‘new’ Mije lower. (If they pay out cash for any reason then their assets fall and the value of the company falls by the amount of cash paid out)
Hi john.Hope you doing well.
Is EVA is no more in the p4 syllabus?I am sure i have seen some where here you mentioned its been excluded now. BUt in BPP exam kit ques. dec 2009(anchorage retail co.) requirement asked for EVA. I am confused please help.EVA has been removed from the syllabus.
You must be using an old edition of the Revision Kit – the current edition still has the Anchorage Retail question, but the part asking for the EVA has been removed.
Morning John,
I was wondering if we do swaps for foreign currency as well or for exam interest rate swap is more important or not?
Thank you.In future please start a new thread when it is a new topic 🙂
Foreign exchange swaps can be asked, but it very rare (and they are effectively really interest rate swaps anyway as far as the exam is concerned).
It is interest rates swaps that are most important.
Ok thank you.Yes i will surely remember your request of new thread.Sorry about that.
Hi John, Under Proposal 1, I couldn’t understand the rationale of using the earnings of Nente Co to compute the percentage gain of Mije Co?
Given that Mije is taking over Nente, the new earnings of Miji will increase by the earning of Nente and the synergy benefit.
Why do we deduct the amount paid for the shares of Nente Co (7.08 million) from the additional increase in share price?
As the question is asking for the increase in value of the share price, is it indirectly asking what is the increase in the value of the company?
Yes – it was the increase in the value of the company after the acquisition. However, the more that is paid for the company being taken over then the less the gain in value will be.
Hi John, why not add the earnings and cost synergy of Nente Co to the earnings of Mjie and compute the % change?
In other questions, the value of the option was computed by adding the NPV + the option value as the figures represent the intrinsic value and the time value respectively but in this question, only the option value was used to compute the percentage gain in the value of the follow-on product to Nente Co share, i’m quite confused on this.
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