Charles plc is considering a value-enhancing merger with a firm Pedra plc. Charles plc has 5 million
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Question:
a. Charles is considering to offer £1.30 per share for each of Pedra’s shares.
i. Calculate the Net Present Value of the takeover for the acquirer. Comment on the result.
ii. To achieve a zero NPV on the acquisition, what price should the acquirer offer on one Pedra share? What would the minimum level of annual
financial savings be to justify the bid price of £1.30?
b. Assume the acquirer wishes to create a new firm, NEW plc, where each set of shareholders surrender their shares in exchange for NEW’s
shares. Five Pedra shares are converted into one NEW share; while for Charles shareholders, two Pedra shares are converted into one NEW
share. Calculate the post-bidshare prices of Charles and Pedra in response to an announcement of a such bid. Comment on the likely success of such an offer to Pedra’s shareholders when over the past year the average takeover premium has been 20 percent.
Related Book For
Corporate Finance and Investment decisions and strategies
ISBN: 978-1292064062
8th edition
Authors: Richard Pike, Bill Neale, Philip Linsley
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