Europium plc is a large conglomerate which is seeking to acquire other companies. The Business Development division of Europium plc has recently identified an engineering company – Promithium plc – as a possible acquisition target.

Financial information relating to each company is given below:

Income Statement for the year ended 30 November 20XX Europium plc Promithium plc Turnover 820 260 Profit on ordinary activities before tax 87 33 Taxation on profit on ordinary activities (27) (9)

Profit on ordinary activities after tax 60 24 Dividends (15) (5)

Retained profit for the year 45 19 Price:earnings ratio 16 10 Capital and reserves

£1 ordinary shares 80 30 Retained profits 195 124 275 154 The Business Development division of Europium plc believes that shares of Promithium plc can be acquired by offering its shareholders a premium of 25 per cent above the existing share price. The purchase consideration will be in the form of shares in Europium plc.

Required

(a) Calculate the rate of exchange for the shares and the number of shares of Europium plc which must be issued at the anticipated price in order to acquire all the shares of Promithium plc.

(b) Suggest reasons why Europium plc may be prepared to pay a premium above the current market value to acquire the shares of Promithium plc.

(c) Calculate the market value per share of Europium plc following the successful takeover and assuming the P:E ratio of Europium plc stays at the pre-takeover level. Would you expect the P:E ratio of Europium plc to stay the same?

(d) State what investigations Europium plc should undertake before considering a takeover of Promithium plc.