seminar5materials / P4AFM-RQB_PDF_d08 / P4AFM-RQB-Qs_d08

REVISION QUESTION BANK – ADVANCED FINANCIAL MANAGEMENT (P4)

Additional notes:

(i)The realisable value of Omnigen’s assets, net of all debt repayments, is estimated to be £82 million.

(ii)The PE ratios of two of Omnigen’s quoted competitors in the electrical industry are 13:1 and 15:1 respectively.

Required:

Discuss and evaluate what price, or range of prices, Laceto should offer to purchase the shares of Omnigen. State clearly any assumptions that you make. (25 marks)

Approximately 17 marks are for calculations and 8 for discussion.

(b)Before making a bid for Omnigen the managing director of Laceto hears a rumour that a bid for Laceto might be made by Agressa.com plc, an Internet retailer specialising in the sale of vehicles and electrical goods. Summarised financial data for Agressa.com are shown below.

Agressa’s current share price is £26·50, and the company has 15 million issued ordinary shares.

Required:

Prepare a brief report for the managing director of Laceto which analyses how Laceto might defend itself from a takeover bid from Agressa.com (8 marks)

(c)Discuss how the method of payment for the potential takeovers in (a) and (b) above

(40 marks)

Question 29 SYNERGY

You have been asked to produce a briefing memo for senior management at your company on the subject of mergers and acquisitions. Your memo should identify and discuss:

(c)Whether or not mergers and acquisitions should be undertaken to achieve corporate

(15 marks)

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ADVANCED FINANCIAL MANAGEMENT (P4) – REVISION QUESTION BANK

Question 30 INTERGRAND

(a)Discuss the advantages to a company of establishing an overseas operating subsidiary by:

(b)The Board of Directors of Intergrand plc wishes to establish an operating subsidiary in Germany through the acquisition of an existing German company. Intergrand has undertaken research into a number of German quoted companies, and has decided to attempt to purchase Oberberg AG. Initial discussions suggest that the directors of Oberberg AG may be willing to recommend the sale of 100% of the company’s equity to Intergrand for a total cash price of 115 million Euro, payable in full on acquisition.

Oberberg has provided the managers of Intergrand with internal management information regarding accounting/cash flow projections for the next four years.

The projections are in money/nominal terms.

Oberberg AG, financial projections

Euro (million)

Oberberg AG summarised Income Statement for the year ending 31 December 2002

Euro (million)

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ADVANCED FINANCIAL MANAGEMENT (P4) – REVISION QUESTION BANK

(xvi)The corporate tax rate in Germany is 25%, and in the UK 30%. A bilateral tax treaty exists between the two countries whereby tax paid in one country may be credited against any tax liability in the other country.

(xvii)If Intergrand acquires Oberberg existing exports to Germany yielding a pre-tax cash flow of £800,000 per annum will be lost. It is hoped that about half of these exports can be diverted to the French market.

Required:

Intergrand has suggested that Oberberg should be valued based upon the expected present value (to infinity) of the operating free cash flows of Oberberg. These would be discounted at an all-equity rate, and adjusted by the present value of all other relevant cash flows, discounted at an appropriate rate(s).

Acting as a consultant to Intergrand plc, prepare a report evaluating whether or not Intergrand should offer the 115 million Euro required to acquire Oberberg AG. Include in your report discussion of other commercial and business factors that Intergrand should consider prior to making a final decision.

Assume that it is now mid-December 2002.

Approximately 22 marks are available for calculations and 10 for discussion.

(40 marks)

Question 31 PAXIS PLC

Paxis plc will soon announce a takeover bid for Wragger plc, a company in the same industry. The initial bid will be an all share bid of four Paxis shares for every five Wragger shares.

The most recent annual data relating to the two companies are shown below:

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REVISION QUESTION BANK – ADVANCED FINANCIAL MANAGEMENT (P4)

The takeover is expected to result in cost savings in advertising and distribution, reducing the operating costs (including depreciation) of Paxis from 76% of sales to 70% of sales. The growth rate of the combined company is expected to be 6% per year for four years, and 5% per year thereafter. Wragger’s debt obligations will be taken over by Paxis. The corporate tax rate is expected to remain at 30%.

Sales and costs relevant to the decision may be assumed to be in cash terms.

Required:

(a)Using free cash flow analysis for each individual company and the potential combined company, estimate how much synergy is expected to be created from the takeover. State clearly any assumptions that you make.

Note: The weighted average cost of capital of the combined company may be assumed to be the market weighted average of the current costs of capital of the individual companies, weighted by the current market value of debt and equity of the combined company, with the equity of Wragger adjusted for the

(c)Discuss the factors that might influence whether the initial bid is likely to be accepted by

(d)Estimate by how much the bid might be increased without the shareholders of Paxis

suffering a fall in their expected wealth, and discuss whether or not the directors of Paxis should proceed with the bid. (5 marks)

(e)Once the bid is announced, discuss what defences Wragger plc might use against the bid

(40 marks)

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REVISION QUESTION BANK – ADVANCED FINANCIAL MANAGEMENT (P4)

Rationalisation following the acquisition will involve the following transactions (all net of tax effects):

(i)Sale of surplus warehouse facilities for £6·8 million.

(ii)Redundancy payments costing £9·0 million.

(iii)Wage savings of £2·7 million per year for at least five years.

Minprice’s cost of equity is estimated to be 14·5%, and weighted average cost of capital 12%. Savealot’s cost of equity is estimated to be 13%.

Required:

(a)Discuss and evaluate whether or not the bid is likely to be viewed favourably by the shareholders of both Minprice Plc and Savealot Plc. Include discussion of the factors that are likely to influence the views of the shareholders.

(b)Discuss the possible effects on the likely success of the bid if the offer terms were to be amended to a choice of one new Minprice Plc 10 year zero coupon debenture redeemable at £100 for every 10 Savealot Plc shares, or 325 pence per share cash. Minprice Plc could currently issue new 10 year loan stock at an interest rate of 10%.

(c)The directors of Savealot Plc have decided to fight the bid and have proposed the following measures:

(i)Announce that their company’s profits are likely to be doubled next year.

(ii)Alter the Articles of Association to require that at least 75% of shareholders need to approve an acquisition.

(iii)Persuade, for a fee, a third party investor to buy large quantities of the company’s shares.

(iv)Introduce an advertising campaign criticising the performance and management ability of Minprice Plc.

(v)Revalue fixed assets to current values so that shareholders are aware of the company’s true market values.

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ADVANCED FINANCIAL MANAGEMENT (P4) – REVISION QUESTION BANK

Question 35 REFLATOR PLC

A division of Reflator plc has recently experienced severe financial difficulties. The management of the division is keen to undertake a buy-out, but in order for the buyout to succeed it needs to attract substantial finance from a venture capital organisation. Reflator plc is willing to sell the division for £2·1 million, and the managers believe that an additional £1 million of capital would need to be invested in the division to create a viable going concern.

Possible financing sources:

Equity from management £500,000, in 50 pence ordinary shares.

Funds from the venture capital organisation:

Equity £300,000, in 50 pence ordinary shares Debt: 8·5% fixed rate loan £2,000,000

9% subordinated loan with warrants attached £300,000.

The warrants are exercisable any time after four years from now at the rate of 100 ordinary shares at the price of 150 pence per share for every £100 of subordinated loan.

The principal on the 8·5% fixed rate loan is repayable as a bullet payment at the end of eight years. The subordinated loan is repayable by equal annual payments, comprising both interest and principal, over a period of six years.

The division’s managers propose to keep dividends to no more than 15% of profits for the first four years.

Independently produced forecasts of earnings before tax and interest after the buy-out are shown below:

Corporate tax is at the rate of 30% per year.

The managers involved in the buy-out have stated that the book value of equity is likely to increase by about 20% per year during the first four years, making the investment very attractive to the venture capital organisation. The venture capital organisation has stated that it is interested in investing, but has doubts about the forecast growth rate of equity value, and would require warrants for 150 shares per £100 of subordinated loan stock rather than 100 shares.

Required:

(b)On the basis of the above data, estimate whether or not the book value of equity is likely

(c)Evaluate the possible implication of the managers agreeing to offer warrants for 150

(15 marks)

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