Question one required candidates to provide a value per share of an unlisted company (part (i)); estimate the gains to the target unlisted company’s equity holders and the predator company’s equity holders based on synergies, a modified PE ratio and different payment methods (part (ii)); and work out the value of a follow-on real option (part (iii).

The discussion part required candidates to discuss the values and gains with and without the project to both sets of equity holders, and the assumptions made (part (iv)). This question contained four professional marks available for well-structured answers presented in a report format.

Generally this question was done adequately. Many candidates made good attempts at all the parts and, apart from part (ii), gained reasonable marks. The presentation of the answers was varied, with some answers given in report style, but many candidates answering the question without paying due attention to what a report should contain. Answers which gave a report title but then did not structure the answer appropriately gained few professional marks.

Part (i) was generally done adequately. A significant number of candidates calculated the growth rate, although some misread the question, and read the growth rate information as: ‘by 25%’ instead of ‘to 25%’. In a number of responses, when calculating the free cash flow to firm, errors were made such as including interest and when calculating the tax impact.

Many candidates did not deduct the debt value from the free cash flow to get to the value per share. Some candidates did not divide the total value by the number of shares to get a share price.

A significant number of candidates found difficulty with part (ii) and especially with obtaining a value for the combined company based on combined company earnings, which included synergies and a modified PE ratio. This is a fairly standard method of obtaining the value of the combined company and it was expected that most candidates should have been able to do these computations at P4 level.

Although a few numerical errors were made, which gave an incorrect answer for the option, in most cases high marks were achieved for part (iii).

Responses to part (iv) were mixed. Some good answers covered all the requirements and got the majority of the marks, even if the discussion centred on incorrect numerical answers. However, not all candidates considered the impact on both companies’ equity holders.

Many responses only considered the impact on Nente Co’s equity holders and/or did not consider the impact of the option. Fewer marks were given to these responses.