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F3 Financial Strategy Questions 177–184 (page: 24)

Which of the following statements is true of a spin-off (or demerger)?

Company C has received an unwelcome takeover bid from Company P. Company P is approximately twice the size of Company C based on market capitalisation. Although the two companies have some common business interests, the main aim of the bid is diversification for Company P. The offer from Company P is a share exchange of 2 shares in Company P for 3 shares in Company C. There is a cash alternative of $5.50 for each Company C share. Company C has substantial cash balances which the directors were planning to use to fund an acquisition. These plans have not been announced to the market.
The following share price information is relevant. All prices are in $.

Which of the following would be the most appropriate action by Company C's directors following receipt of this hostile bid?

Company M is a listed company in a highly technical service industry. The directors are considering making a cash offer for the shares in Company Q, an unquoted company in the same industry.
Relevant data about Company Q:   
* The company has seen consistent growth in earnings each year since it was founded 10 years ago.   
* It has relatively few non-current assets.   
* Many of the employees are leading experts in their field. A recent exercise suggested that the value of the company's human capital exceeded the value of its tangible assets. The directors and major shareholders of Company Q have indicated willingness to sell the company. Before negotiations become too advanced, the directors of Company M are considering the benefits to their company that would follow the acquisition.
Which THREE of the following are the most likely benefits of the acquisition to Company M's shareholders?

Company P is a pharmaceutical company listed on an alternative investment market.   The company is developing a new drug which it hopes to market in approximately six years' time. Company P is owned and managed by a group of doctors who wish to retain control of the company.  The company operates from leased laboratories with minimal fixed assets.  Its value comes from the quality of its research staff and their research. The company currently has one approved drug which generates sufficient cashflow to cover day to day operations but not sufficient for major new research and development. Company P wish to raise debt finance to develop the new drug. 
Recommend which of the following types of debt finance would be most appropriate for Company P
to help finance the development of this new drug. 

A listed publishing company owns a subsidiary company whose business activity is training. It wishes to dispose of the subsidiary company.
The following information is available:

The board of the publishing company believe that the value of the subsidiary company, and hence the value of the equity invested in it, can be determined by calculating the present value of the subsidiary's free cashflows.
Which of the following is the most appropriate discount rate to use when determining the enterprise value of the company?

A company generates operating profit of $17.2 million, and incurs finance costs of $5.7 million.
It plans to increase interest cover to a multiple of 5-to-1 by raising funds from shareholders to repay some existing debt. The pre-tax cost of debt is fixed at 5%, and the refinancing will not affect this.
Assuming no change in operating profit, what amount must be raised from shareholders?
Give your answer in $ millions to the nearest one decimal place.
 

A company has a covenant on its 5% long-term bond, stipulating that its retained earnings must not fall below $2 million. The company has 100 million shares in issue. Its most recent dividend was $0.045 per share. It has committed to grow the dividend per share by 4% each year. The nominal value of the bond is $60 million. It is currently trading at 80% of its nominal value. Next year's earnings before interest and taxation are projected to be $11.25 million. The rate of corporate tax is 20%.
If the company increases the dividend by 4%, advise the Board of Directors if the level of retained earnings will comply with the covenant?

A company's gearing is well below its optimal level and therefore it is considering implementing a share re-purchase programme. This programme will be funded from the proceeds of a planned new long-term bond issue. Its financial projections show no change to next year's expected earnings. As a result, the company plans to pay the same total dividend in future years.
If the share re-purchase is implemented, which THREE of the following measures are most likely to decrease?