QUESTION 2 ` (25 Marks)
Dundee (Ltd) is a dairy company which is in the process of negotiating the acquisition of
Glencoe (Ltd). The management estimates that the acquisition will result in economies of scale
and the additional benefits will amount to R30 million. Dundee (Ltd) is prepared to make a cash
payment of R55 million for Glencoe (Ltd). The following information is available for the two
companies:
Required:
2.1 Calculate the value of the take-over. (4 marks)
2.2 Calculate the net present value of the proposed take-over. (3 marks)
2.3 Calculate the take-over premium. (3 marks)
2.4 Determine the market price per share after the proposed take-over. (4 marks)
Assume that the take-over (acquisition) was based on earnings per share.
2.5 Determine the exchange ratio based on earnings per share. (2 marks)
2.6 Calculate the post take-over earnings per share. (5 marks)
2.7 Calculate the benefits, if any, for both parties. (4 marks)
2.1 Calculate the value of the take-over:
Value of the takeover = Cash payment + Additional benefits
Value of the take-over = R55 million + R30 million
Value of the take-over = R85 million
2.2 Calculate the net present value of the proposed take-over:
To calculate NPV, we need to discount the future benefits at an appropriate discount rate. Let's assume the discount rate is 10%.
NPV = Additional benefits / (1 + r)^n
NPV = R30 million / (1 + 0.10)^1
NPV = R30 million / 1.10
NPV = R27.27 million
2.3 Calculate the take-over premium:
Take-over premium = (Value of the take-over - Market value of Glencoe (Ltd)) / Market value of Glencoe (Ltd)
Take-over premium = (R85 million - Market value) / Market value
2.4 Determine the market price per share after the proposed take-over:
Market price per share = Value of the take-over / Number of shares outstanding
2.5 Determine the exchange ratio based on earnings per share:
Exchange ratio = Price of Dundee (Ltd) per share / Price of Glencoe (Ltd) per share
2.6 Calculate the post take-over earnings per share:
Post take-over earnings per share = (Earnings of Dundee (Ltd) + Earnings of Glencoe (Ltd)) / Total number of shares outstanding
2.7 Calculate the benefits, if any, for both parties:
Benefits for Dundee (Ltd) = Additional benefits - Cash payment
Benefits for Glencoe (Ltd) = Take-over premium * Market value of Glencoe (Ltd) - Additional benefits