Regearing the beta to reflect the Group's Post Acq Gearing

Dear Tutor,

This is a Valuation of Type III Acquisition.

I am bit confused with the differing solution provided by BPP and another Text Book I used.

The same scenario applied in both text book and BPP solution. The Acquiring Company will fund,the acquisition of the Target Company’s 100% shares by new Debt. Hence if the Target Company had say £5,000,000 shares, it will be funded by new 7% debt of £5,000,000 (assume no premium).

The Acquiring company itself has £8,000,000 shares.

The confusion is this: When the Beta asset of the combined company has been calculated and used to regear to get the Beta of Equity of the combined company (Post Acquisition?), BPP used both £5,000,000 and £8,000,000 in the calculation of regaring to get Beta of Equity of the Combined Company, BUT the text book used only £8,000,000 in the calculation and their explanation is that since the shares or the Target will be financed by Debt, the Only shares that will remain will be that of the Acquiring Company (i.e £8,000,000).

I have tried both and as expected it gives different Beta of Equity for the combined company

I would lean towards the solution of the text book because if the shares of the target will be financed by new debt, hence the value of the target’s shares should not be used to regear to get the Beta of Equity of the combined.

What do you advise?

Thanks