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On 1 July 2019, Sven Ltd acquires all 1,600,000 shares in Reindeer Ltd. As part of the purchase consideration, the shareholders of Reindeer were offered $2 cash for every five Reindeer shares, plus three Sven Ltd share for every eight Reindeer shares. At the date of acquisition the share price of Reindeer Ltd and Sven Ltd were $5 and $6, respectively.Reindeer Ltd had dividends declared of $8,000 at the date of acquisition. The shares were acquired ex.div.What is the purchase price?

Question

On 1 July 2019, Sven Ltd acquires all 1,600,000 shares in Reindeer Ltd. As part of the purchase consideration, the shareholders of Reindeer were offered 2cashforeveryfiveReindeershares,plusthreeSvenLtdshareforeveryeightReindeershares.AtthedateofacquisitionthesharepriceofReindeerLtdandSvenLtdwere2 cash for every five Reindeer shares, plus three Sven Ltd share for every eight Reindeer shares. At the date of acquisition the share price of Reindeer Ltd and Sven Ltd were 5 and 6,respectively.ReindeerLtdhaddividendsdeclaredof6, respectively.Reindeer Ltd had dividends declared of 8,000 at the date of acquisition. The shares were acquired ex.div.What is the purchase price?

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Solution

The purchase price is $1,920,000.

Here are the steps to understand this:

  1. Cash Consideration: The shareholders of Reindeer Ltd were offered 2cashforeveryfiveReindeershares.So,thetotalcashconsiderationis(1,600,000shares/5)2 cash for every five Reindeer shares. So, the total cash consideration is (1,600,000 shares / 5) * 2 = $640,000.

  2. Share Consideration: The shareholders of Reindeer Ltd were also offered three Sven Ltd shares for every eight Reindeer shares. The share price of Sven Ltd was 6atthedateofacquisition.So,thetotalshareconsiderationis(1,600,000shares/8)3shares6 at the date of acquisition. So, the total share consideration is (1,600,000 shares / 8) * 3 shares * 6 = $1,800,000.

  3. Dividends Declared: Reindeer Ltd had dividends declared of $8,000 at the date of acquisition. However, the shares were acquired ex-dividend, which means that the right to receive the dividends belongs to the previous shareholders, not the new owner. Therefore, the dividends declared do not affect the purchase price.

  4. Purchase Price: The purchase price is the sum of the cash consideration and the share consideration. So, the purchase price is 640,000+640,000 + 1,280,000 = $1,920,000.

Therefore, the purchase price is $1,920,000.

This problem has been solved

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