Exam F3 Topic 2 Question 238 Discussion
Actual exam question for CIMA's F3 exam
Question #: 238
Topic #: 2
Question #: 238
Topic #: 2
Company A plans to acquire Company B in a 1-for-1 share exchange.
Pre-acquisition information is as follows:
Post-acquisition information is as follows:
Annual earnings are expected to increase by $4 million.
The P/E multiple of the combined company is expected to be 12 times.
If the acquisition proceeds, what is the expected percentage increase in the post acquisition share price of Company A?
Pre-acquisition information is as follows:
Post-acquisition information is as follows:
Annual earnings are expected to increase by $4 million.
The P/E multiple of the combined company is expected to be 12 times.
If the acquisition proceeds, what is the expected percentage increase in the post acquisition share price of Company A?
Suggested Answer: D Vote an answer
Pre-acquisition
Company A
Earnings = $50m
P/E = 12 # Market value = 50 × 12 = $600m
Shares = 100m # Share price = 600 / 100 = $6.00
Company B
Earnings = $16m
Combined current earnings = 50 + 16 = $66m.
Post-acquisition assumptions
Earnings increase by $4m # New total earnings
= 66 + 4 = $70m
Combined P/E = 12
# Total market value = 70 × 12 = $840m
Effect of the 1-for-1 share exchange
Company B has 40m shares, so Company A issues 40m new shares.
New total shares in Company A = 100m + 40m = 140m
Post-acquisition share price:
New price=Total valueTotal shares=840m140m=$6.00\text{New price} = \frac{\text{Total value}}{\text
{Total shares}} = \frac{840m}{140m} = \$6.00New price=Total sharesTotal value=140m840m=$6.00 This is the same as the original $6.00, so the percentage increase in Company A's share price is:
6.00#6.006.00=0%\frac{6.00 - 6.00}{6.00} = 0\%6.006.00#6.00=0%
So the expected increase in share price is 0%.
Company A
Earnings = $50m
P/E = 12 # Market value = 50 × 12 = $600m
Shares = 100m # Share price = 600 / 100 = $6.00
Company B
Earnings = $16m
Combined current earnings = 50 + 16 = $66m.
Post-acquisition assumptions
Earnings increase by $4m # New total earnings
= 66 + 4 = $70m
Combined P/E = 12
# Total market value = 70 × 12 = $840m
Effect of the 1-for-1 share exchange
Company B has 40m shares, so Company A issues 40m new shares.
New total shares in Company A = 100m + 40m = 140m
Post-acquisition share price:
New price=Total valueTotal shares=840m140m=$6.00\text{New price} = \frac{\text{Total value}}{\text
{Total shares}} = \frac{840m}{140m} = \$6.00New price=Total sharesTotal value=140m840m=$6.00 This is the same as the original $6.00, so the percentage increase in Company A's share price is:
6.00#6.006.00=0%\frac{6.00 - 6.00}{6.00} = 0\%6.006.00#6.00=0%
So the expected increase in share price is 0%.
by Elvis at Oct 29, 2026, 01:11 AM
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