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ACCA Strategic Professional · Advanced Financial Management · Regulatory framework and processes

Bidder Kappa offers Target Sigma a choice: 2 Kappa shares for every 5 Sigma shares, or $4.00 cash per Sigma share. Kappa's share price is $11.00 and Sigma has 10 million shares. Kappa's price is expected to fall to $9.50 on announcement of a share-funded deal. A Sigma shareholder holding 1,000 shares wants to choose the better value after the fall, with Kappa's price at $9.50. What is the correct conclusion?

Cash is better by $200. After the price fall, two Kappa shares for five Sigma shares is worth 0.4 x $9.50 = $3.80 per Sigma share, compared with $4.00 cash, so 1,000 shares gain $200 more by taking cash.

  1. ACash is better by $200 because share offer is worth $3.80 per Sigma shareCorrect
  2. BShare offer is better by $200 because it is worth $4.40 per share
  3. CCash is better by $400 because the share offer is worth $3.60 per share
  4. DBoth are equal in value at $4.00

Explanation

Share offer per Sigma share = 2/5 x $9.50 = $3.80. Cash is $4.00, so cash is better by $0.20 x 1,000 = $200. At the pre-announcement price the share offer would be 0.4 x 11 = $4.40, which is the trap in the second option.

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