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Hello John 🙂 , when we want to calculate the percentage gain to the target company under share for share exchange, should we use the predator company’s current share price or combined company share price?
Sigra Co uses combined company share price while Hav Co uses predator company’s current share price. So, I’m a bit confused
It depends whose point of view we are considering.
The predator company is able to estimate what their post-acquisition share price will be and use that to calculate what gain will be made by their existing shareholders (subject to the price paid for the target company).
The shareholders in the target company do not have that information and so will base their decision (such as, in the case of Hav Co, deciding which payment method they prefer) using the pre-acquisition share price of the predator company.
It is not always immediately clear as to which is being asked for in the exam, so do make sure (as always in AFM) that you state your assumptions and will then get some credit for what you have done even if you had misinterpreted what was required.
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