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PURSUIT CO (JUN 11 ADAPTED)- Kaplan Exam kit

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › PURSUIT CO (JUN 11 ADAPTED)- Kaplan Exam kit

  • This topic has 2 replies, 2 voices, and was last updated 4 years ago by John Moffat.
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  • February 15, 2021 at 2:41 pm #610502
    Jiya024
    Member
    • Topics: 168
    • Replies: 56
    • ☆☆☆

    Sir again in this question’s part c’s “iii) Estimates the amount of debt finance needed, in addition to the cash reserves, to acquire Fodder Co and concludes whether Pursuit Co’s current capital structure can be maintained.”

    “Answer: The current value of Pursuit Co is $140,000,000, of which the market value of equity and debt are $70,000,000 each. The value of the combined company before paying Fodder Co shareholders is approximately $189,169,000, and if the capital structure is maintained, the market values of debt and equity will be approximately $94,584,500each. This is an increase of approximately $24,584,500 in the debt capacity.

    The amount payable for Fodder Co’s debt obligations and to the shareholders including the premium is approximately $49,116,500 [4,009 + 36,086 × 1.25]. If $24,584,500 is paid using the extra debt capacity and $20,000,000 using cash reserves, an additional amount of approximately $4,532,000 will need to be raised. Hence, if only debt finance and cash reserves are used, the capital structure cannot be maintained.”

    I understood what they did. but I wanted to ask you that IF Persuit co was not planning to pay off the debt of Fodder co. we would still have considered the payment to Fodder co. as MV of firm (inclusive of its debt and equity)? Or we would have just taken MV of equity as payment to Fodder co. and used this to find our total need for funds?

    February 15, 2021 at 3:55 pm #610531
    Jiya024
    Member
    • Topics: 168
    • Replies: 56
    • ☆☆☆

    sir i think you missed out on this!

    sorry for bothering you so much.

    February 15, 2021 at 4:18 pm #610542
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    What do you mean I missed out on this??

    If you mean that I had not answered it immediately it is because I answer questions for 5 papers and answer them in the order in which they were asked. We say that we try to answer within 24 hours – we do not sit at the computer 24 hours a day. After spending 2 hours this morning and over three hours now answering questions, you are lucky that I am answering you now and not tomorrow 🙂

    For this question we would have considered the MV of the firm as a whole because this was what the question specifically asked you to do.

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