Elimu Co, a listed company, is a major supplier of educational material, selling its products in many countries. It supplies Schools and colleges and also produces learning material for business and professional exam. Elimu Co has exclusive contracts to produce material for some examining bodies. Elimu Co has a well-defined management structure with formal processes for making major decision Although Elimo Co produces celine learning material, most of its profits are still derived from sales of traditional textbooks, Elimu Co's growth in profits over the last few years has been slow and its directors are currently reviewing its beg-term strategy. One area in which they feel that Elimu Co must become much more involved is the production of online testing materials for exams and to validate course and textbook leaming, Elimu Co has recently made a bid for Mtandao Co, a smaller listed company. Mtandao Co also supplies a range of educational material, but has been one of the leaders in the development of online testing and has shown strong profit growth over recent years. All of Mtandao Co's initial five founders remain on its board and still hold 45% of its issued share capital between them. From the start, Mtandao Co's directors have been used to making quick decisions in their areas of responsibility. Although listing has imposed some formalities, Mtandao Co has remained focused on acting quickly to gain competitive advantage, with the five founders continuing to give strong leadership Elimu Co's initial bid of five shares in Elimu Co for three shares in Mtandao Co was rejected by Mtandao Co's board. There has been further discussion between the two bourds since the initial offer was rejected and Elimu Co's board is now considering a proposal to offer Mtandao Co's sharchokers two shares in Elimu Co for one share in Mtandao Co ora cash ahernative of Kshs.22.75 per Mandan Co stare. It is expected that Mtandao Co's shareholders will choose one of the following operes: To accept the two-shares-fc-ce-share offer for all the Mtandao Co shares or To accept the cash offer for all the Mtandao Co shares: , 60% of the shareholders will take up the two-shares-for-one-share offer and the remaining 40% will take the case offer. In case of the third option being accepted, it is thought that there of the company's founders, holding 20% of the share capital in Tocil, will take the cash offer and not join the combined company. The remaining two founders will probably continue to be involved in the business and be members of the combined company's board Elim Co's finance director has estimated that the merger will produce cual post-tax synergies of Shes. 20 million. He expects Elimu Co's current price camnings (PE) ratio to remain unchanged after the acquisition. Extracts from the two companies' most recent accounts are shown below: Elimu Mtandao Kshs. m Kshs. In Prolit before finance cost and in 446 182 Finance costs Profit before tax 372 158 Tax (76) (30) Profit after tas 296 128 Issued Kshs. I nominal shares PVE ratios, based on most recent accounts Long-term liabilities (market value (Kshs.m) Cash and cada equivalents (Kshs.m) The tax rate applicable to both companies is 20% 340 million 540 220 90 million 15.9 193 1 Page Tax Assume that Elimu Co can obtain further debe funding at a pre-tax cost of 7-5% and that the return on cash surpluss is 5 pre- Assume all that any debt funding needed to complete the acquisitive will be reduced instantly by the balances of cash and cash equivalents held by Elimu Co and Mundo Co Required: a) Argue the case for and against the acquisition of Mtandao Co from the viewpoint of Elimu Co. (4 marks) b) Evaluate the funding required for the acquisition of Mtandao Co and the impact on Elimu Co's camins per share and gearing for each of the three options given above (Il marks) (Total: 15 marks Elimu Co, a listed company, is a major supplier of educational material, selling its products in many countries. It supplies Schools and colleges and also produces learning material for business and professional exam. Elimu Co has exclusive contracts to produce material for some examining bodies. Elimu Co has a well-defined management structure with formal processes for making major decision Although Elimo Co produces celine learning material, most of its profits are still derived from sales of traditional textbooks, Elimu Co's growth in profits over the last few years has been slow and its directors are currently reviewing its beg-term strategy. One area in which they feel that Elimu Co must become much more involved is the production of online testing materials for exams and to validate course and textbook leaming, Elimu Co has recently made a bid for Mtandao Co, a smaller listed company. Mtandao Co also supplies a range of educational material, but has been one of the leaders in the development of online testing and has shown strong profit growth over recent years. All of Mtandao Co's initial five founders remain on its board and still hold 45% of its issued share capital between them. From the start, Mtandao Co's directors have been used to making quick decisions in their areas of responsibility. Although listing has imposed some formalities, Mtandao Co has remained focused on acting quickly to gain competitive advantage, with the five founders continuing to give strong leadership Elimu Co's initial bid of five shares in Elimu Co for three shares in Mtandao Co was rejected by Mtandao Co's board. There has been further discussion between the two bourds since the initial offer was rejected and Elimu Co's board is now considering a proposal to offer Mtandao Co's sharchokers two shares in Elimu Co for one share in Mtandao Co ora cash ahernative of Kshs.22.75 per Mandan Co stare. It is expected that Mtandao Co's shareholders will choose one of the following operes: To accept the two-shares-fc-ce-share offer for all the Mtandao Co shares or To accept the cash offer for all the Mtandao Co shares: , 60% of the shareholders will take up the two-shares-for-one-share offer and the remaining 40% will take the case offer. In case of the third option being accepted, it is thought that there of the company's founders, holding 20% of the share capital in Tocil, will take the cash offer and not join the combined company. The remaining two founders will probably continue to be involved in the business and be members of the combined company's board Elim Co's finance director has estimated that the merger will produce cual post-tax synergies of Shes. 20 million. He expects Elimu Co's current price camnings (PE) ratio to remain unchanged after the acquisition. Extracts from the two companies' most recent accounts are shown below: Elimu Mtandao Kshs. m Kshs. In Prolit before finance cost and in 446 182 Finance costs Profit before tax 372 158 Tax (76) (30) Profit after tas 296 128 Issued Kshs. I nominal shares PVE ratios, based on most recent accounts Long-term liabilities (market value (Kshs.m) Cash and cada equivalents (Kshs.m) The tax rate applicable to both companies is 20% 340 million 540 220 90 million 15.9 193 1 Page Tax Assume that Elimu Co can obtain further debe funding at a pre-tax cost of 7-5% and that the return on cash surpluss is 5 pre- Assume all that any debt funding needed to complete the acquisitive will be reduced instantly by the balances of cash and cash equivalents held by Elimu Co and Mundo Co Required: a) Argue the case for and against the acquisition of Mtandao Co from the viewpoint of Elimu Co. (4 marks) b) Evaluate the funding required for the acquisition of Mtandao Co and the impact on Elimu Co's camins per share and gearing for each of the three options given above (Il marks) (Total: 15 marks