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Chapter 11
Example 2
Company A has 200m shares with a current market value of GBP4 per share.
Company B has 90m shares with a current market value of GBP2 per share.
A makes an offer of 3 new shares for every 5 currently held in B. A has worked
out that the present value of synergies will be GBP40m.
Required:
Calculate the expected value of a share in the combined company
(assuming that the given share prices have not yet moved to anticipate
the takeover), and advise the shareholders in company B whether the
offer should be accepted.
Solution
MV of A = GBP800m
MV of B = GBP180m
PV of synergies = GBP40m
TOTAL = GBP1,020m
No. of new shares = 200m + (3/5) × 90m = 254m
New share price = 1,020m/254m = GBP4.02
Shares MV Old wealth Change
A 200m GBP804m GBP800m GBP4m
B (3/5) × 90m = 54m GBP216m GBP180m GBP36m
The wealth of the shareholders in company B will increase by GBP36m as a
consequence of the takeover. This is a (36/180) 20% increase in wealth.
Company B's shareholders should be advised to accept the 3 for 5 share for
share offer.
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