Problem 3 (10 Marks) The following Shark Ltd plans on expanding market share by
ID: 2616390 • Letter: P
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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 $10,000 per year in costs and the required return for Shark is 10%. Shark will exchange 0.3 Shark shares for each outstanding Minnow Share Required: a. Complete the table for the merged company. (6 marks) b.What is the net cost of the takeover to Shark? (2 marks) What is the change in the total market value of the Shark shares that were on issue before the takeover? c. (2 marks)Explanation / Answer
The extra synergy due to merger = Extra Cost savings / cost of capital = 10000/10% = 100,000
Shares issued due to Monnow after merger = 0.3 * 100,000 = 30,000 shares
Total No of shares after merger = No of shares of shark + no of new shares of shark issued to minnows = 100000 +30000 = 130,000
Total earnings = Earning of shark + Earnings of minnows + Earnings due to merger = 200000 + 75000 + 10000 = 285,000
Total Market value of shark after merger =Market value of shark + Market Value of Minnows + Extra market value due to synergy = 2,000,000 + 500,000 + 100,000 = 2,600,000
Price per share = Total market Value after merger/Total no of outstanding shares = 2,600,000/130000 = 20
a)
Item
Shark
Minnow
Merged Company
Price Per share($)
20
5
20
No. of Shares
100,000
100,000
130,000
Total earnings ($)
200,000
75,000
285000
Total Market Value($)
2,000,000
500,000
2,600,000
b)Net cost of Takeover = Market value of Minnow + Value due to synergy = 500,000 + 100,000 = 600,000
c)Change in Market value before and after takeover = Final market Value - Initial Market value of sharks =
?2,600,000 - 2,000,000 = 600,000
Best of Luck. God Bless
Item
Shark
Minnow
Merged Company
Price Per share($)
20
5
20
No. of Shares
100,000
100,000
130,000
Total earnings ($)
200,000
75,000
285000
Total Market Value($)
2,000,000
500,000
2,600,000
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