1.1 How much will the shareholders of Surrey Ltd gain or lose on a per share basis. 1.2 Determine the purchase price of Surrey Ltd that is implied by the 1.25 exchange ratio. 1.3 Calculate the net present value of the proposed acquisition. 1.4 Calculate the proposed acquisition premium. 1.5 Compute the earnings per share for Watford Refiners before and after the proposed acquisition.
Watford Refiners is contemplating the acquisition of Surrey Ltd by means of a share issue. The combination of the two firms' operations will result in economies of scale and the additional value generated is estimated to be R20 million. The financial directors of the two companies have agreed to an equal split of this value between each firm's shareholders. It was also agreed that the purchase consideration for the Surrey Ltd acquisition should be based on an exchange of 1.25 shares of Watford Refiners for each share of Surrey Ltd.
Key acquisition data is detailed below:
Company No. of shares Price per share Earnings after Tax
Watford Refiners 8 million R12 R10 million
Surrey Ltd 5 million R9 R7 million
1.1 How much will the shareholders of Surrey Ltd gain or lose on a per share basis.
1.2 Determine the purchase price of Surrey Ltd that is implied by the 1.25 exchange ratio.
1.3 Calculate the
1.4 Calculate the proposed acquisition premium.
1.5 Compute the earnings per share for Watford Refiners before and after the proposed acquisition.
SOLUTION:-
1.
The shareholders of Surrey Ltd will gain R 2.29 per share (i.e. R 11.29 - R 9).
2.
The Purchase price of Watford Refiners that is implied by the 1.25 exchange ratio will be
No of shares of Watford Refiners issued x Price per share =
= 8 million x R 11.29
= R 90.32 million
3.
Net Present Value =Today's value of the expected cash flow - post-acquisition market price per share
NPV = R 20 - R 11.29 = R 8.71
Net Present Value=R 8.71
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