Questions and Answers of Corporate Financial Management

=+b If the purchase is made with cash what will be the price offered for each of Small's shares?
=+vTransaction costs (advisers' fees, etc.) are estimated at £3m. Large has 30 million shares in issue and Small has 45 million. Assume the managers are shareholder-wealth maximisers.Required aDoes
=+1 Large ple is considering the takeover of Small ple. Large is currently valued at 60m on the stock market while Small is valued at 30m. The economies of scale and other benefits of the merger are
=+11 What does it mean when an offer goes 'unconditional"?
=+10 What is the winner's curse?
=+9 Explain the terms horizontal mergers, vertical mergers and conglomerate mergers.
=+8 How do mergers differ from other investment decisions?
=+7 Explain the following:synergy;the internalisation of transactions;bargain buying;hubris;the survival motive;the free cash flow merger motive.
=+6 List some actions which might assist a successful post-merger integration.
=+5 What are the three stages of a merger?
=+4 List the potential beneficiaries from mergers and briefly explain whether, on average, they do gain from mergers.
=+3 Explain the significance of the following for the merger process:-a concert party;the 3% rule;the 30% rule;the Takeover Panel;the OFT;the Competition Commission;a dawn raid.
=+2 Briefly describe the alternative methods of payment for target firms and comment on their advantages and disadvantages.
=+1 List as many motives for mergers as you can.
=+discuss some of the reasons for merger failure and some of the practices promoting success.
=+describe the merger process and the main regulatory constraints;comment on the question: 'Who benefits from mergers?";
=+express the advantages and disadvantages of alternative methods of financ-ing mergers;
=+describe the rich array of motives for a merger;
=+2 Write a report which relates the dividend frameworks and theories discussed in this chapter to the evidence provided by the following UK companies.
=+how a change in policy could be executed.
=+1 Consider the dividend policy of your firm or one you know well. Write a report detailing the factors contributing to the selection of this particular policy. Make rec-ommendations on the
=+c What are the dangers associated with dividend cuts and how might the firm alle-viate them?
=+b If the investment is accepted, and therefore dividends are cut for the next two years, what will be the value of one share?
=+This year's dividend has just been paid and the next is due in one year. Guff has an opportunity to invest in a new product, Stuff, during the next two years. The direc-tors are considering cutting
=+8 (Examination level) Guff plc, an all-equity firm, has the following earnings per share and dividend history (paid annually).Year Earnings Dividend per share per share This year 21p Sp Last year
=+Write a report detailing the factors that influence dividend policy and recommend a dividend policy for Elec Co. based on your arguments.
=+The managing director of Elec Co. has asked you to conduct a thorough review of dividend policy and to try to explain why it is that Lighting has a market value much greater than Elec Co. (Both
=+7 (Examination level) The retailers Elec Co. and Lighting are competitors in the electrical goods market. They are similar firms in many respects: profits per share have been very similar over the
=+e Explain why companies tend to follow the policy in b rather than a.
=+b If the directors chose to have a smooth dividend policy based on the maintainable regular dividend what would you suggest the dividends in each year should be?Include in your consideration the
=+6* (Examination level) Tesford ple has estimated net cash flows from operations (after interest and taxation) for the next five years as follows:The cash flows have been calculated before the
=+Use the dividend valuation model and state whether Vale's shares are a good buying opportunity for a stock market investor.
=+b The risk-free return on government securities is currently 6.5 per cent, the risk premium for shares above the risk-free rate of return has been 5 per cent per annum and Vale is in a risk class
=+5" (Examination level) Vale ple has the following profit-after-tax history and dividend-per-share history:Year Profit after tax Dividend per share This year 10,800,000 5.4 Last year(t-1)8,900,000
=+able regular dividend. However the company has developed a new product range which will require major investment in the next 12 months. The amount needed is roughly equivalent to the proposed
=+4(Examination level) Sendine ple has maintained a growth path for dividends per share of 5 per cent per year for the past seven years. This was considered to be the maintain-
=+3 Re-examine the article about Wassall's payout policy (see Exhibit 22.2). Discuss the advantages and disadvantages of this approach.
=+Use the above sentence together with the following one written in the same letter to shareholders by Warren Buffett (1984), plus dividend policy theory, to explain why this is an important issue:
=+2 (Examination level) 'We believe managers and owners should think hard about the circumstances under which earnings should be retained and under which they should be distributed.'
=+Explain, with reference to dividend theory, how this firm may have settled into this comfortable routine. Describe any problems that might arise with this approach.
=+1 (Examination level) "These days we discuss the dividend level for about an hour a year at board meetings. It changes very little from one year to the next - and it is just as well if you consider
=+10 Outline a dividend policy for a typical fast-growth and high-investment firm.
=+5 What is the effect of taxation on dividend payout rates?
=+4 How might clientele effects influence dividend policy?
=+1 What are the two fundamental questions in dividend policy?
=+discuss the role of scrip dividends and share repurchase.
=+resolution of uncertainty and the exceptionally high discount rate applied to more distant dividends;
=+have much more value than those in the far future because of the
=+outline the hypothesis that dividends received now, or in the near future,
=+dividends as a signalling device;
=+describe the influence of particular dividend policies attracting different"clients' as shareholders, the effect of taxation and the importance of
=+v2 Define value-based management.
=+4 What are the five actions available to increase value?
=+5 Describe at least three arguments for managers putting shareholder-wealth maximisa-tion as the firm's objective.
=+6 Invent a mission statement and strategic objectives that comply with value-based man-agement principles.
=+7 Outline the evidence against the popular view that shareholders judge managerial per-formance on the basis of short-term earnings figures.
=+8 What is 'good growth' and what is 'bad growth'?
=+2 Describe three of the ways in which accounts can be manipulated and distorted.
=+3 Gather some more data on T & N, GSK, and P&O from newspapers, industry sources, annual reports, etc. and give a more detailed account than that given in this chapter of the ways in which value
=+Shareholder value management has been described as a 'weird Anglo-American con-cept'. Describe this philosophy and consider whether it has applicability outside the Anglo-American world.
=+5 Do you feel comfortable with the notion that commercial organisations acting in a competitive environment should put shareholders' wealth creation as their first prior-ity? If not, why not?
=+7. Which of the following two companies creates more value, assuming that they are making the same initial investment?Company A's projected profits Year Profit (€000s)Last year 1,000 11,000
=+Profits for both companies are 20 per cent of sales in each year. With company A, for every £1 increase in sales 7p has to be devoted to additional debtors because of the generous credit terms
=+Apart from the debtor and inventory adjustments the profit figures of both firms reflect their cash flows. The cost of capital for both firms is 14 per cent.Ready ple is financed entirely by equity
=+.00 Ready's business is such that as sales increase, working capital does not change.Ready currently has £10m in cash not needed for business operations that could be
=+used to pay a dividend immediately. Under current policy, post-tax earnings (and free cash flow) of £10m per year are expected to continue indefinitely. All earnings in future years are expected
=+b The value of the company if the current dividend (time 0) is missed and the retained earnings are put into investments (with the same risk as current set of projects)yielding an extra £2m per
=+9 What is the annual value creation of Sheaf ple which has an investment level of£300,000 and produces a rate of return of 19 per cent per annum compared with a required rate of return of 13 per
=+Assuming that the planning horizon for Sheaf ple is 12 years, calculate the value of the firm. (Assume the investment level is constant throughout.)
=+10* Busy ple, an all equity-financed firm, has three strategic business units. The polythene division has capital of £8m and is expected to produce returns of 11 per cent for the next five years.
=+b Draw a value-creation and strategic business unit performance spread chart.
=+Develop five ideas for increasing the value of the firm. State your assumptions.
=+Apply the four key elements of value creation, the 'expand or not to expand?' model and the value action pentagon to a firm you are familiar with. Write a report for senior executives.
=+explain the extent of the ramifications of value-based management;
=+discuss the main elements to examine when evaluating alternative strategies for the business from a value perspective; map business activities in term of industry attractiveness, competitive
=+cycle stage and make capital allocation choices;
=+describe a system for making strategic choices that requires both
=+qualitative thinking and quantitative analysis;
=+describe the four main tasks for the corporate centre (head office).
=+1 List the main areas in which value principles have an impact on the managerial process. Write a sentence explaining each one.
=+2 What is an SBU and how can a value-creation profile chart be used to improve on an SBU's performance?
=+3 List the three stages of strategic analysis and briefly describe the application of value-based management ideas to each one.
=+Invent a company and show how the strategy planes diagram can be used to enhance
=+shareholder wealth. Explain each dimension of the planes as you do so.
=+1 (Examination level) Imagine you are an expert on finance and strategy and have been asked by a large company with subsidiaries operating in a variety of industrial sectors
=+to explain how the organisation might be changed by the adoption of value principles.
=+Write a report to convince the managerial team that the difficulties and expense of transformation will be worth it.
=+2 In the form of an essay discuss the links between strategy and finance with reference to value-based management principles.
=+3 Payne ple has six SBUs engaged in different industrial sectors:Proportion of Annual value firm's capital creation (fm)1 Glass production 0.20 32 Bicycles retailing 0.15 10 3 Forestry 0.06 24
=+Make assumptions (and explain them) about the industry attractiveness and competi-tive position of Payne and its stage in the life-cycle of value potential. Place the SBUs on a strategy planes
=+4 The corporate centre in most firms is an expensive drag on the rest of the organisa- tion.' Explain to this sceptical head of an SBU how the corporate centre can contribute to value creation.
=+ 1 Identify an SBU in a company you know well. Conduct a value-based analysis and write a report showing the current position and your recommendations for change.
=+ Include in the analysis value-creation profile charts, strategy planes diagrams, sources of competitive advantage (value drivers) and qualitative evaluation of strategies.
=+2 Write a report for senior managers pointing out how incentive schemes within the firm should be changed to achieve goal congruence around shareholder wealth maximisation.
=+describe, explain and use the following measures of value:- discounted cash flow-shareholder value analysis- economic profit;
=+be able to provide a brief outline of economic value added and cash flow return on investment (CFROI).
=+1 List the stages in the conversion of profit and loss accounts to cash flow figures.
=+5 What are the alternatives when trying to establish a figure for the amount of capital devoted to a business?
=+1 Blue ple is a relatively small company with only one SBU. It manufactures wire grilles for the consumer market for cooker manufacturers and for export. Following a thor-ough investigation by the
=+The cooker sales sector uses £2m of capital and will return 14 per cent per annum for seven years when its planning horizon ends. Its WACC is 16 per cent.The export sector has a positive

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