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Hi Sir,
Not understandindg the share for share exchange ans from the solutions for part (ii) of this question. Can you please explain how they arrived at the two answers for that part of the question. Thanks in advance,
If the takeover takes place, then we can calculate the total earnings of the combined company – current earnings of both companies plus the synergies of $150,000 p.a.. This gives total earnings of $3.97M
Because Mije is paying for the takeover in shares, they will end up with more shares in issue.
Currently they have10M, but they will issue 2 new shares for every 3 in Nente. Nente has 960,000/0.40 = 2.4M shares and so the new shares issued will be 2/3 x 2.4M = 1.6M.
This means that there will be 10 + 1.6 = 11.6M shares in future.So….the new earnings per share will be $3.97M / 11.6 M = $0.342.
Since we are told that the PE ratio is 15, this will mean that the new market value per share will be 15 x $0.342 = $5.13.
I think that the rest of the question should now make sense, but if not then shout 🙂
Hi John,
In the first part of the question we use the FCF to find the equity value of the target company.
In the second part, to calculate the increase in value of the share price, we need to calculate the value of the combined company. Why for this part of the question do we switch to a P/E valuation method of a company? Why are we not continuing on with a FCF analysis of the combined company?
Are there particular scenarios where it would be best to use FCF and other scenarios where we should automatically assume to use P/E valuation?
Thanks in advance!
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