Dawn Raider plc has just offered one of its shares for two shares in Sleepy Giant plc,
Question:
Dawn Raider plc has just offered one of its shares for two shares in Sleepy Giant plc, a business in the same industry as itself. Extracts from the financial statements of each business for the year ended 31 May Year 8 appear below:
If the takeover succeeds, Dawn Raider plans to combine Sleepy Giant’s marketing and distribution channels with its own, with a post-tax saving of £1 million a year. In addition, it expects to be able to increase Sleepy Giant’s profits after tax by at least £5 million a year by better management. Dawn Raider’s own profits after tax are expected to be £23 million (excluding the £1 million saving already mentioned) in the year ended 31 May Year 9.
One of the shareholders of Sleepy Giant has written to its chairman arguing that the bid should not be accepted. The following is an extract from his letter: ‘The bid considerably undervalues Sleepy Giant since it is below Sleepy Giant’s net assets per share. Furthermore, if Dawn Raider continues its existing policy of paying only 2p a share as a dividend, Sleepy Giant’s shareholders will be considerably worse off.’
Required:
(a) Calculate:
(i) The total value of the bid and the bid premium.
(ii) Sleepy Giant’s net assets per share at 31 May Year 8.
(iii) The dividends the holder of 100 shares in Sleepy Giant would receive in the year before and the year after the takeover.
(iv) The earnings per share for Dawn Raider in the year after the takeover.
(v) The share price of Dawn Raider after the takeover assuming that it maintains its existing price/earnings ratio.
(b) Comment on:
(i) the points that the shareholder in Sleepy Giant raises in his letter (ii) the amount of the bid consideration.
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