Q1. Ecobank has decided to enter the microfinance market to seek more favourable growth and profit opportunities. After extensive search of a large number of potential candidates to merge with, it narrowed the candidates down to Sika Savings. As a financial analyst for Ecobank, you have been asked to investigate the merger with Sika in order to advise management. Some basic data gathered about the two institutions and presented to you are provided in the table below: Ecobank Sika Earning Per Share ¢5.00 ¢1.50 Share Price ¢90.00 ¢20.00 Number of Shares 1000,000 600,000 Price Earning Multiple 18x 13.33x Further investigations conducted revealed that investors currently expect a steady compound growth of about 6% each year in Sika’s earnings. Under Ecobank’s control and management, this growth is expected to increase to about 8% each year, without any additional capital investment and without any changes in the riskiness of operations Required (i)Compute the increase in value resulting from the merger (ii)Assuming Ecobank decides to pay ¢25 for each share in Sika, what are the gains or losses likely to be for theshareholders of the two companies. (iii)What will be the gains or losses if Ecobank offers one of its shares for every three shares of Sika (iv)Calculate the gains or losses on the assumption that the market does not expect Sika’s growth rate to materialise (v)Discuss the implications of (iv) with respect to (i), (ii), and (iii)
Q1. Ecobank has decided to enter the microfinance market to seek more favourable growth and profit opportunities. After extensive search of a large number of potential candidates to merge with, it narrowed the candidates down to Sika Savings. As a financial analyst for Ecobank, you have been asked to investigate the merger with Sika in order to advise management. Some basic data gathered about the two institutions and presented to you are provided in the table below:
Ecobank Sika
Earning Per Share ¢5.00 ¢1.50
Share Price ¢90.00 ¢20.00
Number of Shares 1000,000 600,000
Price Earning Multiple 18x 13.33x
Further investigations conducted revealed that investors currently expect a steady compound growth of about 6% each year in Sika’s earnings. Under Ecobank’s control and management, this growth is expected to increase to about 8% each year, without any additional capital investment and without any changes in the riskiness of operations
Required
(i)Compute the increase in value resulting from the merger
(ii)Assuming Ecobank decides to pay ¢25 for each share in Sika, what are the gains or losses likely to be for theshareholders of the two companies.
(iii)What will be the gains or losses if Ecobank offers one of its shares for every three shares of Sika
(iv)Calculate the gains or losses on the assumption that the market does not expect Sika’s growth rate to materialise
(v)Discuss the implications of (iv) with respect to (i), (ii), and (iii)
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