Question

Question 3 Company AB has a market value of GH¢50 million. Company CD has a market value of GH¢200 million. CD has determined that if it combines resources with AB, cost savings will be worth GH¢25 million today. On this basis CD makes an offer to buy AB. If CD makes a cash offer of GH¢65 million for all the shares of AB, what is the cost of this purchase to CD?
(i) What are the gains of this transaction?
(ii) Suppose CD has issued 100 of its shares to its shareholders, and is considering issuing 30 shares to the shareholders of AB, what is the cost of the share offer?
(iii) What is the net present value of the transaction under the cash offer to CD?
(iv) What is the net present value under the share offer?​

Answer 1

Answer:

Explanation:

MARKET VALUES

Company AB - 50 million Ghanaian cedis

Company CD - 200 million Ghanaian cedis

CD offers to buy all of AB's shares at 65 million Ghanaian cedis

The cost of this purchase is 15 million Ghanaian cedis because this is the extra amount company CD placed, above the market value of 50 million to purchase AB. This is the economic cost.

The gain of this transaction is 10 million cedis, that is 25-15 (million). This is the total cost savings from this transaction.