Question

BLUERAIL LTD, a large social networking firm, is considering acquiring BLUE LOG LTD, a relatively new app development firm.

Assume the following details for the current year are relevant:

BLUERAIL BLUE LOG

Price-earnings ratio                                                          10                                           12                 

Total earnings                                                                  R21 600 000                         R6 720 000

Number of shares in issue                                            9 000 000                              4 200 000

Dividend per share                                                              R1.60                                     R0.96

BLUELOG earnings and dividends are expected to grow by 18% over the next three years, after which the earnings and dividends are expected to grow at a sustainable growth rate of 8% per annum.

BLUE LOG ordinary shareholders’ required rate of return is 15%.

The industry average price-earnings (PE) ratio is 9.

BLUERAIL estimates that the acquisition of BLUELOGwill increase the earnings of the combined firm by R3.6 million.

BLUERAIL CONSIDER CASH OFFER WHAT IS THE MINIMUM OFFER THEY MUST MAKE FOR ALL BLUELOG ISSEUD SHARES BASED ON DIVIDEND GROWTH MODEL AND PRICE EARNING MULTIPLE(USE CURRENT EARNINGS)

Answer 1

Computation of Cash Offer based on Dividend Growth Model

Year	0	1	2	3	4
Dividend	0.96	1.13	1.34	1.58	1.70
Growth Rate		18%	18%	18%	8%
Price at the end of year 4					24.34
		1.13	1.34	1.58	24.34
PVF @15%		0.870	0.756	0.658	0.572
Present Value		0.99	1.01	1.04	13.92
Price per Share					16.95
Total Price					7,12,06,577.87

Computation of Cash Offer based on Price Earning Ratio

		Blue Log
1	P/E Ratio	12
2	Total Earnings	67,20,000
3	Number of Shares	42,00,000
4	Dividend Per Share	0.96
5	EPS (2/3)	1.60
6	Market Price per Share (5*1)	19.20
7	Total Price	8,06,40,000.00