Page 264 - AFM Integrated Workbook STUDENT S18-J19

Chapter 12

5 Calculate the value of a share in the combined company, and use this to
assess the change in wealth of the shareholders after the takeover.

Combined company share price is expected to be $17.4m/6.6m = $2.64

Therefore if a Bebo Co shareholder accepts the offer, he receives 3 shares
in the combined company (worth 3 × $2.64 = $7.92) in exchange for 10
shares in Bebo Co (worth 10 × $0.65 = $6.50).

The premium is $1.42 (i.e. $7.92 - $6.50), or 21.8% ($1.42/$6.50).

This offer looks to be financially attractive to the Bebo Co shareholders.

Illustrations and further practice

Now try Illustration 1 and TYU 3 from Chapter 12

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