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What exchange ratio mega limited shareholders negotiate

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Reference no: EM132512757

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 R6 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 what is the dividend growth model?

1.1.2 how to calculate 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.

Reference no: EM132512757

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