Killisick - Question: Killisick Killisick plc wishes to...

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Question: Killisick Killisick plc wishes to acquire Holbeck plc. The directors of Killisick are trying to justify the acquisition to the shareholders of both companies on the grounds that it will increase the wealth of all shareholders. The supporting financial evidence produced by Killisick’s directors is summarised below: £000 Killisick Holbeck Operating profit 12,400 5,800 Interest payable 4,431 2,200 Profit before tax 7,969 3,600 Tax 2,789 1,260 Earnings available to ordinary shareholders 5,l80 2,340 Earnings per share (pre-acquisition) 14.80 pence 29.25 pence Market price per share (pre-acquisition) 222 pence 322 pence Estimated market price (post-acquisition) 240 pence Estimated equivalent value of one old Holbeck share (post-acquisition) 360 pence Payment is to be made with Killisick ordinary shares, at an exchange ratio of 3 Killisick shares for every 2 Holbeck shares. Required: (a) Show how the directors of Killisick produced their estimates of post-acquisition value and, if you do not agree with these estimates, produce revised estimates of post- acquisition values. All calculations must be shown. State clearly any assumptions that you make (10 marks) (b) If the acquisition is contested by Holbeck plc, using Killisick’s estimate of its post- acquisition market price calculate the maximum price that Killisick could offer without reducing the wealth of its shareholders. (5 marks) (c) The board of directors of Holbeck plc later informally indicate that they are prepared to recommend to their shareholders a 2 for I share offer. Further information regarding the effect of the acquisition on Killisick is given below: i. The acquisition will result in an increase in the total pre-acquisition after tax operating cash flows of £2.75 million per year indefinitely. ii. Rationalisation will allow machinery with a realisable value of £7.2 million to be disposed of at the end of the next year. iii. Redundancy payments will total £3.5 million immediately and £8.4 million at the end of the next year. iv.
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This note was uploaded on 06/16/2011 for the course FINC 103 taught by Professor Thompson during the Spring '11 term at UCLA.

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Killisick - Question: Killisick Killisick plc wishes to...

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