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Financial Strategy Questions and Answers

Question 125

Company A has made an offer to acquire Company Z.

Both companies are quoted and their current market share prices are:

• Company A - $4

• Company Z - $5

Shareholders in company Z have been given three alternative offers:

• Cash of $5.50 per share

• Share for share exchange on the basis of 3 for 2

• 10.5% long dated bond for every 20 shares

The bond is has a nominal value of $100 and the expected yield on bonds of similar risk is 10%.

You are advising a Company Z shareholder on the three offers.

She requires a 15% premium if she is to accept the offer.

In providing your advice, which of the following statements is correct?

Options:

The bond offer is only worth $100 which represents a zero premium and should be rejected.

The bond offer is above the minimum threshold and should be accepted.

The share for share exchange is the only offer which is above the acceptance threshold.

The value of the consideration given by the cash and bond offers is certain, unlike the share offer.

Question 126

Company U has made a bid for the entire share capital of Company B.

Company U is offering the shareholders in Company B the option of either a share exchange or a cash alternative.

Advise the shareholders in Company B which THREE of the following would be considered disadvantages of accepting the cash consideration?

Options:

Cash consideration is certain whereas Company U's future share price performance is uncertain.

Interest rates on deposit accounts are currently at a historic low and are expected to remain low.

Company U is not expected to change its dividend policy post-acquisition.

Taxation is payable on realised capital gains.

There will be no opportunity to participate in the future economic success of Company U.

Question 127

Country X's short-term interest rates are slightly higher than its long-term rates. Which THREE of the following statements are correct?

Options:

This difference may reverse.

Country X's currency is expected to strengthen in the long-term.

Interest rates will definitely fall.

Interest rates are expected to fall.

A long-term borrower would save by taking out a short-term loan and then refinancing

Question 128

A company plans to raise $12 million to finance an expansion project using a rights issue.

Relevant data:

• Shares will be offered at a 20% discount to the present market price of $15.00 per share.

• There are currently 2 million shares in issue.

• The project is forecast to yield a positive NPV of $6 million.

What is the yield-adjusted Theoretical Ex-Rights Price following the announcement of the rights issue?

Options:

$16.00

$14.00

$9.00

$11.00

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Financial Strategy Questions and Answers

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