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Hi john,
I have a general doubt, if the question says asset beta of combined company is the weighted average of individual companies asset bets weighted in proportion of company market value. Here in this question they use the weighted proportion of total market value of the company ie using 140 m and 40m. If we use the equity value of of the companies will I get mark?Thanks in advance
Sir,
I need one more clarification for the same question. I have calculated as below:
Total value of Fodder is 40089 hence MVE- 36080
Total vale of Pursuit Equity is 70,000 (140*.50)
Total value of combined company is 189,070 so the total equity value will be 94,535 (188070/2)
So synergy calculation is = 94,535 -(70,000 + 36,080) = -11545Premium paid to fodder is 9020 so net benefit to pursuit is =20,565 (11545+9020)
Can you please tell whether I can follow this method?
ThanksAlthough you would not lose all the marks, you would not get full marks. The question specifically says to weight by the market values of the companies and the market values of the companies are the equity plus the debt.
No – the net benefit to Pursuit is not as you have typed. It is different from the examiners answer and the examiners answer is correct!!
You need to look at the total market values (not just equity). Even if it had been valid, your final lines make no sense at all. You had a negative synergy benefit and any premium paid to fodder would make the benefit even more negative!!
Hi John,
Thanks for your reply.
Sorry I got got to mention that in the last line it’s a negative synergy and by paying premium it’s negative 20565.
For the same question BPP also have negative synergy.For my understanding when we find the synergy of combined company we remove the debt value rit? We need only the market value of equity because that only shows the real value of company because debt portion is amount owed to outsiders. I used to follow that method.is it correct or do we need to consider total market value sorry I am confused I was following this way long time please clarify me
I do not know what BPP have done because they do not have this question in the current edition of their Revision Kit.
However I would assume that they have reprinted the examiners answer as usual, and there certainly is not negative synergy!!The synergy benefit is $9,074,000. Of this $9,022,000 is the premium required to acquire Fodder, which leaves a net benefit to Pursuit shareholders of $52,000.
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