6Europium 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:

Profit and Loss Account for the year ended 30 November 1997

	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.