QUESTION ONE Ibajane PLC is planning to make a bid for the entire share capital of...

QUESTION ONE
Ibajane PLC is planning to make a bid for the entire share capital of Luano PLC, a company
operating in the same industry of honey processing. Ibajane PLC is expected that a bid of K75,
000 of the entire share capital of Luano PLC will be successful and most likely to be approved
by the regulators. The acquisition of Luano PLC will increase Ibajane PLC’s after tax operating
cash flows over the next few years by:
Year 1 K35, 600
Year 2 K37, 400
Year 3 K38, 300
Year 4 K39, 100
Luano PLC has K15, 000 par value of 5.75% irredeemable debenture trading at par. Luano PLC
has an equity beta of 1.941, Zambia’s sovereign Eurobond yield is 8% and the average market
return on Lusaka Stock Exchange (LUSE) is 10%. The corporation tax is at 30%. Far
importantly, Ibajane PLC always discount cash flows using the weighted average cost of capital.
REQUIRED:
a) Evaluate whether the acquisition of Luano PLC will add value to Ibajane PLC?

Solutions

Expert Solution

Therefore, the acuitision of Luano Plc will add value to Ibajane Plc to the extent of K 42,278.34 .

jeff jeffy answered 1 year ago

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