Reference no: EM132621504

AngelCare Trading (hereinafter referred to as 'AngelCare') is considering making an offer to purchase Siyenza Telecommunications (hereinafter referred to as 'Siyenza'). The AngelCare corporate finance team has collected the following information:

                                           AngelCare                      Siyenza

Price-earnings ratio            11.5                          8

Shares outstanding          10,000,000                 3,000,000

Earnings                             R20,000,000           R4,800,000

From the data gathered by AngelCare's corporate finance team, Siyenza's earnings and dividends (currently R0.88 per share) are expected to grow at a constant rate of 6% per year. Siyenza's shareholders require a return of 12.5%.

AngelCare management believes that the acquisition of Siyenza will provide the firm with some economies of scale that will increase the earnings of the merged by R1.2 million per year. The average price-earnings multiple for the telecommunications industry is 9.2.

Required:

Question 1:  How much should AngelCare offer for Siyenza's shares, based on the following:

1.1 Dividend growth model

1.2 Price-earnings multiple

Question 2: What exchange ratio would leave Siyenza's shareholders indifferent about the takeover?

Question 3:  Prove that an exchange ratio of 0.90 would be more beneficial to Siyenza's shareholders than AngelCare's shareholders.

Question 4: What possible reasons could AngelCare management provide to their shareholders to motivate their interest in acquiring Siyenza?