The competition authorities are investigating the takeover of Company Z by a larger company, Company Y.
Both companies are food retailers.
The takeover terms involve using a part cash, part share exchange means of payment.
Company Z is resisting the bid, arguing that it undervalues its business, while lobbying extensively among politicians to sway public opinion against the bidder.
Which of the following actions by Company Y is most likely to persuade the competition authorities to approve the acquisition?
It is now 1 January 20X0.
Company V, a private equity company, is considering the acquisition of 40% of the equity of Company A for a total amount of $15 million.
Company A has been established to develop a new type of engine which will be launched at the end of 20X1. Company A is forecasting that the new engine will result in free cash flows to equity of $2m in its first year of operation and that this will rise by 8% per year for the foreseeable future.
The new engine is the only commercial activity that Company A is involved in.
Company V intends to sell its stake in Company A when the new engine is launched.
Company A has a cost of equity of 12%.
Assuming that Company V receives an amount that reflects the present value of their shares in company A. what is the estimated annual rate of return to Company V from this investment? (To the nearest %)
An all equity financed company reported earnings for the year ending 31 December 20X1 of $8 million.
One of its financial objectives is to increase earnings by 5% each year.
In the year ending 31 December 20X2 it financed a project by issuing a bond with a $1 million nominal value and a coupon rate of 4%.
The company pays corporate income tax at 20%.
If the company is to achieve its earnings target for the year ending 31 December 20X2, what is the minimum operating profit (profit before interest and tax) that it must achieve?
A company has just received a hostile bid. Which of the following response strategies could be considered?
A company wishes to raise additional debt finance and is assessing the impact this will have on key ratios.
The following data currently applies:
• Profit before interest and tax for the current year is $500,000
• Long term debt of $300,000 at a fixed interest rate of 5%
• 250,000 shares in issue with a share price of $8
The company plans to borrow an additional $200,000 on the first day of the year to invest in new project which will improve annual profit before interest and tax by $24,000.
The additional debt would carry an interest rate of 3%.
Assume the number of shares in issue remain constant but the share price will increase to $8.50 after the investment.
The rate of corporate income tax is 30%.
After the investment, which of the following statements is correct?
A company is financed by debt and equity and pays corporate income tax at 20%.
Its main objective is the maximisation of shareholder wealth.
It needs to raise $200 million to undertake a project with a positive NPV of $10 million.
The company is considering three options:
• A rights issue.
• A bond issue.
• A combination of both at the current debt to equity ratio.
Estimations of the market values of debt and equity both before and after the adoption of the project have been calculated, based upon Modigliani and Miller's capital theory with tax, and are shown below:
Under Modigliani and Miller's capital theory with tax, what is the increase in shareholder wealth?
A listed company has suffered a period of falling revenues and profit margins. It has been obliged to issue a profit warning to the market and its share price has fallen sharply. The company relies heavily on debt finance and is discussing with its banks possible refinancing options to assist with a restructuring programme.
Which THREE of the following are likely to be of MOST interest to the company's banks when they review the refinancing requests?
Clinic A provides free healthcare to all members of the community, funded by the central Government.
Clinic B provides healthcare which has to be paid for by the individual patients. It is a listed company, owned by a large number of shareholders.
In comparing the above two organisations and their objectives, which THREE of the following statements are correct?
Company A is located in Country A, where the currency is the A$.
It is listed on the local stock market which was set up 10 years ago.
It plans a takeover of Company B, which is located in Country B where the currency is the B$, and where the stock market has been operating for over 100 years.
Company A is considering how to finance the acquisition, and how the shareholders of Company B might respond to a share exchange or cash (paid in B$).
Which of the following is likely to explain why the shareholders of Company B would prefer a share exchange as opposed to a cash offer?
A company's directors plan to increase gearing to come in line with the industry average of 40%. They need to know what the effect will be on the company's WACC.
According to traditional theory of gearing the WACC is most likely to:
