Page 356 - AFM Integrated Workbook STUDENT S18-J19

Chapter 15

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.

Chapter 13

Question 1

Nadal Co’s revenue was $250 million in the most recent accounting period.
This is expected to grow at 5% per year for the next three years, and then stay
constant into perpetuity. The operating profit margin is expected to be 8% next
year and then 10% per year thereafter.

Historically the amount of replacement non-current asset investment has been
equal to depreciation and this is expected to continue. Annual incremental non-
current asset investment is expected to be $4 million per year for the next three
years, before falling to zero. Annual incremental working capital investment
over the next three years is expected to be 25% of the increase in revenue.

The company pays tax at a rate of 20%, and has a weighted average cost of
capital of 7%. It owns short-term investments with a market value of $15 million
and is partly funded by debt finance with a market value of $56 million.

Required:

Calculate the value of the company’s equity, using the free cash flow to
firm method.

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