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Chapter 17

Example 2

Consideration

Pearson acquired 60% of the 100,000 $1 ordinary shares in Shakespeare on
1 April 20X6. The purchase consideration was made up of:

 a share exchange of two shares in Pearson for every three shares
acquired in Shakespeare

 the issue of $100 10% loan notes for every 500 shares acquired and

 a deferred cash payment of $1.21 per share acquired payable on 1 April
20X8.

The value of each Pearson share at the date of acquisition was $2.20 and
Pearson has a cost of capital of 10% per annum.

Required:

What is the fair value of consideration paid by Pearson?

Solution

$

2
Share exchange (60% × 100,000 × / 3 x $2.20) 88,000
Loan notes (60% × 100,000 × $100 / 500) 12,000

1
2
Deferred payment (60% × 100,000 × $1.21 × / 1.1 ) 60,000
————
Total consideration $160,000
————

Illustrations and further practice

You can now attempt TYU question 3 from Chapter 17

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