Charles plc is considering a value-enhancing merger with a firm Pedra plc. Charles plc has 5 million ordinary outstanding shares quoted at £2.00 each and Pedra plc has 10 million outstanding ordinary shares, each quoted at £1.00. There are expected annual financial savings of £200,000 to the enlarged firm. This savings would continue indefinitely. The cost of capital is 10 percent.

Required:
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.

Answer rating: 100% (QA)

a Charles is considering to offer 130 per share for each of Pedras shares i Calculate the Net Present Value NPV of the takeover for the acquirer Comment on the result To calculate the NPV of the takeo... View the full answer