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What exchange ratio should mega limited shareholders

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Reference no: EM132512886

Supa-Mega

Supa Limited, a large social networking firm, is considering acquiring Mega Limited, a relatively new app development firm. Assume the following details for the current year are relevant:

                                                  Supa Limited                          Mega Limited

Price-earnings ratio                         10                                   12

Total earnings R21                            600,000                  720,000

Number of shares in issue                    9,000,000                   4,200,000

Dividend per share                              R1.60                        R0.96

  • Mega Limited's earnings and dividends are expected to grow by 18% over the next three years, after which the earnings and dividends are expected to grow at a sustainable growth rate of 8% per annum. Mega Limited's ordinary shareholders' required rate of return is 15%. The industry average price-earnings (PE) ratio is 9. Supa Limited estimates that the acquisition of Mega Limited will increase the earnings of the combined firm by R3.6 million.

Question 1.1 If Supa Limited is considering a cash offer, what minimum offer should they make for all of Mega Limited's issued shares, based on the:

1.1.1 dividend growth model?

1.1.2 price-earnings multiple (using current earnings)?

Question 1.2 If Supa Limited is considering a share exchange, what exchange ratio should Mega Limited shareholders negotiate for themselves in order to capture the total benefit of the merger?

Question 1.3 Given your answer in 1.2 above, show that the acquisition will not result in the dilution of Supa Limited shareholders' earnings per share.

Question 1.4 Briefly discuss any five (5) reasons that the management of Supa Limited could give to their shareholders to justify their interest in acquiring Mega Limited.

Question 1.5 Assuming that an offer has been made to the shareholders of Mega Limited, but their management team does not approve of the transaction, what steps can the management team take to stop the bid?

 

Reference no: EM132512886

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