QUESTION FOUR [12] As treasurer of Holiday Ltd you are investigating the possible acquisition of...
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QUESTION FOUR [12] As treasurer of Holiday Ltd you are investigating the possible acquisition of Leisure Ltd. You have the following basic data: Holiday Leisure Earnings per share (expected next year) R5 R1.50 Dividends per share (expected next year) R3 R0.80 Number of shares 1 million 0.6 million Share price R90 R20 You estimate that investors currently expect a steady growth of about 6 per cent in Leisures earnings and dividends. Under new management, this growth rate would be increased to 8 per cent per year, without any additional capital investment required. Required 4.1. Use the formula to calculate the value of and show that the value of the target firm will be R40 and that the value of the equity will be R24 million (4) 4.2. What is the cost of the acquisition if Holiday pays in cash for each Leisure share? Should it go ahead? (4) 4.3. What is the cost of the acquisition if Holiday offers one of its own shares for every three shares of Leisure? Should it go ahead? (4)
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