(a) Briefly outline the major functions performed by the capital market and explain the importance of each function for corporate financial management. How does the existence of a well-functioning capital market assist the financial management function?

(b) Describe the efficient markets hypothesis and explain the differences between the three forms of the hypothesis which have been distinguished.

(c) Company A has 2 million shares in issue and Company B 6 million. On day 1 the market value per share is £2 for A and £3 for B. On day 2, the management of B decides, at a private meeting, to make a cash takeover bid for A at a price of £3.00 per share. The takeover will produce large operating savings with a value of £3.2 million. On day 4, B publicly announces an unconditional offer to purchase all shares of A at a price of £3.00 per share with settlement on day 15. Details of the large savings are not announced and are not public knowledge.

On day 10, B announces details of the savings which will be derived from the takeover.

Required Ignoring tax and the time-value of money between days 1 and 15, and assuming the details given are the only factors having an impact on the share prices of A and B, determine the day 2, day 4 and day 10 share prices of A and B if the market is: 1 semi-strong form efficient, and 2 strong form efficient.

in each of the following separate circumstances:

(i) the purchase consideration is cash as specified above, and

(ii) the purchase consideration, decided upon on day 2 and publicly announced on day 4, is one newly issued share of B for each share of A.

(ACCA)

QUESTIONS

(i) Stock Price P:E ratio Dividend yield (% gross)

Buntam plc 160p 20 5

Zellus plc 270p 15 3.33

(ii) Earnings and dividend data for Crazy Games plc are given below:

2013 2014 2015 2016 2017 EPS 5p 6p 7p 10p 12p Div. per share (gross) 3p 3p 3.5p 5p 5.5p The estimated before tax return on equity required by investors in Crazy Games plc is 20 per cent.

Required Draft a report for circulation to your private clients which explains:

(a) the factors to be taken into account (including risks and returns) when considering the purchase of different types of traded investments;

(b) the role of financial intermediaries, and their usefulness to the private investor;

(c) the meaning and the relevance to the investor of each of the following:
(i) Gross dividend (pence per share)
(ii) EPS (iii) Dividend cover Your answer should include calculation of, and comment upon, the gross dividends, EPS and dividend cover for Buntam plc and Zellus plc, based on the information given above.
(ACCA)