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On 1 August 2007 Puku purchased 18 million of a total of 24 million equity shares in Sable. The acquisition was through a share exchange of two shares in Puku for every three shares in Sable. Both companies have shares with a par value of $1 each. The market price of Puku’s shares at 1 August 2007 was $5·75 per share. Puku also paid cash of $2·42 per acquired share of Sable. The reserves of Sable on 1 April 2007 were $69 million. Calculate the Cost
of the Investment to be used for Goodwill calculation purposes.Share element is 18m / 3 * 2 * $1 12m
Premium element is 18m / 3 * 2 * ($5.75 – $1) 57m
Cash element 18m * $2.42 43.56mTotal consideration paid is 112,56M
However, I get the feeling that you haven’t given full information. I suspect that the cash payment is not to be made for two more years and also that the company’s cost of capital is 10%. IF I am correct with those guesses, the consideration / cost of investment comes down by $7.56m to an aggregate figure of $105m
In addition, I have no idea why you should have given me the information about Sable’s reserves as at 6 months before the date of acquisition. It has no part to play in calculating the cost of the investment
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