- 15 Marks
FM – May 2023 – L3 – Q7 – Mergers and Acquisitions
Evaluate the share price of Obong plc under different growth scenarios and advise on the takeover bid. Explain EMH and its implications for the market.
Question
Obong plc recently received a takeover bid from Abdul plc. If the bid for Obong plc is successful, it will provide Abdul plc the needed competitive edge in research and development to expand its laboratories into the production of the COVID-19 vaccine.
The shareholders of Obong plc will only accept an offer that meets a required return of 14% on their current shareholdings.
Obong plc recently paid a dividend of N20, and this is expected to grow at a rate of 7% for the foreseeable future.
Required:
a. Estimate the share price of Obong plc today. (2 Marks)
b. If Obong plc accepts the bid from Abdul plc, it is estimated that the new growth rate will rise to 12% for the first 3 years and thereafter stabilize at 7%. Calculate the new share price to the shareholders of Obong plc. (2 Marks)
c. As a financial advisor, recommend to the shareholders of Obong plc whether the offer from Abdul plc should be accepted. (2 Marks)
d. According to Efficient Market Hypothesis (EMH), it is believed that the market would react instantly and accurately to the merger announcement between Obong plc and Abdul plc.
Define briefly the THREE forms of EMH and their implications to the market. (9 Marks)
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