Problem 3 (10 Marks) The following Shark Ltd plans on expanding market share by

Question

Problem 3 (10 Marks) The following Shark Ltd plans on expanding market share by acquiring Minnow Ltd. facts are provided: Merged Company Item Shark Minnow Price per share (S) No. of shares Total earnings (S) Total market value (S) 20.00 100,000 200,000 2,000,000 5.00 100,000 75,000 500,000 The merged company will save $10,000 per year in costs and the required return for Shark is 10%. Shark will exchange 0.3 Shark shares for each outstanding Minnow Share Required: a. Complete the table for the merged company. (6 marks) b.What is the net cost of the takeover to Shark? (2 marks) What is the change in the total market value of the Shark shares that were on issue before the takeover? c. (2 marks)

Explanation / Answer

a. Since Shark will exchnage 0.3 shark shares for every share of minnow, the new number of shares for minnow = 0.3*100,000 = 30,000. Total number of shares of the combined entity = 100,000 (Shark) + 30,000 (Minnow) = 130,000

Now the total earnings = Earnings of Shark + Earnings of Minnow + Cost savings = 200,000+75,000+10,000 = 285,000

Since the required return is 10%, market value = 285,000/0.10 = 2,850,000

Share price/share = 2,850,000/130,000 = $21.92/share

The table is as shown below:

  

b. Orginal Shareholder value of Minnow= 100,000 *5 = 500,000

New share holder value for Minnow = 30,000*20 = 600,000

So, net cost of takeover to Shark = 600,000 -500,000 = 100,000

c.Change in Market value for Shark = 100,000*(21.92-20) = 192,000

Item Shark Minnow Comnined Price per share 20 5 $       21.92 No. of shares 100000 100000 130000 Total earnings 200000 75000 285000 Total Market Value 2000000 500000 2850000

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