6 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:

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.

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Profit and Loss Account for the year ended 30 November 1997 Turnover Profit on ordinary activities before tax Taxation on profit on ordinary activities Profit on ordinary activities after tax Dividends Retained profit for the year Price:earnings ratio Capital and reserves 1 ordinary shares Retained profits Europium plc Promithium plc 820 260 87 16 80 195 275 8g|:|