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Sir under share for share exchange we need to calculate share price post acquisition but I am confused that why did not we use P/E method where we would take the most recent PAT of bidder and seller which is also given in the qs.
instead we have taken the individual values of sigra and dentro and added the synergies to it.
I don’t really understand which method to use when.
The technical article on business valuation on ACCA website was of not much help.
But the answer has used the PE ratios.
We know the current MV of shares in Sigra. We can calculate the PE ratio for Dentro and use that to calculate the MV of shares in Dentro.
The new total MV is the total of Sigra and Dentro MV’s plus the synergy gain.
We cannot use PE ratios to calculate the new MV because we are not told what will happen to the PE ratio after the acquisition and also we have to take account of the synergy gain.
The PE ratio is used for the pre acquisition value.
But now I understood why for post acquisition we have not used PE as we have no info about the post acquisition PE ration.
Siir can you kindly tell when are we supposed to use the method below (Technical article):
combining the pre-acquisition values of the two companies and appending these with the fair value of the synergies
They say use bootstrapping when the bidder PE is higher than Seller but I have seen qs using bootstrapping even when the seller has a higer PE than the bidder
Calculations involving boot-strapping in the exam are rare and in the exam would be relevant in discussion parts of equations. From memory, in exam questions where it has been relevant the question has told you what to do.
Bootstrapping is when the PE of the acquiring company is higher than that of the target company.
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