Math Problem Solver

kit Plc is presently considering the take-over of another company, Cat Plc as part of its expansion

plan. The profit statements for the two companies at end of the last financial year are as follows:

Kit Plc Cat Plc

N000 N000

Sales 20,000 4,000

Less: operating expenses 10,000 3,000

10,000 1,000

The profitable level for both Kit Plc and Cat Plc has been considered over the past few years and

there is no reason to doubt why the trend shall not continue.

The directors of Kit Plc is in the stage of submitting a bid over the entire share capital of Cat Plc.

If the take-over is successful the group-combined sales will increase by N2 million per annum

and operating costs would be reduced by N1 million per annum.

All earnings have in the past been distributed to shareholders by both companies. The details of

the capital structure of both companies and market share price are as follows:

Kit Plc Cat Plc

Nm Nm

Ordinary share of N1 each:

Authorised 100 10

Issued and fully paid 50 5

Value per share N2.00 N1.50

The directors of Kit Plc expected that their shareholders would require a return of 12% per

annum if the take-over is successful.

Ignore taxation and inflation.

Required:

(i) Calculate the maximum price that Kit Plc should be willing to pay for the entire share

capital of Cat Plc.

(ii) Calculate the minimum price that the shareholders of Cat Plc should be willing to

accept for the entire shareholding.

(iii) On the assumption that the agreed price is N10 million, calculate number of shares

issued to the shareholders of Cat Plc.