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Business valuations and market efficiency

Value per share: $15.15m/5m = $3.03 per share

Financed by share-for-share exchange:

The total value of the combined entity post takeover (including synergies) will be
$13m + $3.5m + $2.5m = $19m.

Peel Co shareholders must own $3.85m of this value, otherwise they would not
have agreed to the takeover.

Value remaining for original Douglas Co shareholders = $19m – $3.85m =
$15.15m

All the new shares issued were to Peel Co shareholders, so the original
shareholders’ value of $15.15m relates to the 5m shares they have.

This calculates as $3.03 per share.

All shares have the same value, so the shares now owned by the old Peel Co
shareholders are also worth $3.03 each.

Therefore the number of shares issued to them must have been $3.85m/$3.03
= 1,270,627 shares.

Illustrations and further practice

Now try TYU question 8 from Chapter 20.

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