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My understanding was that share price reflects the total Market Value of a company, and this includes the valuation of Total Equity and Total Debt.
But for some reason in Question 1 of Dec15 Exam, the examiner is calculating the Value of Antra.plc Company as follows:
3$ Share Price x 7.000 Shares = 21.000 mUSD
Debt book/market value = 9.000 mUSD
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= 30.000 mUSDCan somebody explain this? I’m really confuse with this calculation.
21.000 m USD is Value of equity using current share price.
In this question, Cigno Co makes its own valuation of equity, by calculating total Value of company and then deducting Value of debt.Total market value of Anatra estimated by Cigno Co. is 37.478m.
Value of equity = Value of company – Value of debt.
Value of equity estimated by Cigno Co. = 37.478 – 9.000 = 28.478m
Amount that Cingo Co. has to pay to current shareholders = 28.350m (that includes also 35% premium)
So net gain from transaction = 28.478-28.350 = 128m.
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