Quelch plc, an oil and gas transportation firm, has 150 million shares in circulation, each of which is now trading at 800 pence.

Bunter plc, a pipeline maker, is being considered for acquisition by the corporation.

Bunter plc has 100 million shares in circulation, each trading at 420 pence.

In the year recently concluded, Bunter plc's net cash flow after tax was 60 million. Bunter plc's net cash flow after tax is expected to increase by 6% per year in the first three years after the transaction, and then by an average of 3% per year for the foreseeable future, according to Quelch plc.

The transaction will cost 2.25 million, which includes the fees of the experts hired by Quelch plc to design the acquisition and provide post-merger integration counsel.

The optimal discount rate for analyzing Bunter plc's cash flows for acquisition is estimated to be 9.7%.

Requirements:

(a) Estimate Bunter plc's post-acquisition value using the facts provided. Comment on the magnitude of the predicted total value gain as a result of the takeover.

(6 points)

(b) Make relevant calculations to indicate how the overall value gain would be split among Quelch plc and Bunter plc shareholders under each of the following scenarios.

Comment on which, in the opinion of Quelch plc's shareholders, is preferable:

I Quelch plc paid 500 pence each Bunter plc share in cash.

(ii) Quelch plc provided Bunter plc shareholders with one Quelch share for every two Bunter shares they forfeited.

(8 points)

(c) Describe the distinctions between the three broad post merger integration techniques (i.e., absorption, preservation, and symbiosis). Comment on which of these options might be appropriate in the situation.

(6 points)

(Total of 20 points)

CFF 4

3rd QUESTION

The following is a summary of Val-U plc's balance sheet for the year recently ended:

(millions of pounds)

CASH & BANK BALANCES ASSETS

1,340 in other current assets

Fixed & Non-Current Assets 1,960 Total Assets 1,720 Total Current Assets 1,720 Total Current Assets 1,720 Total Current Assets 1,720 Total Current Assets 1,720 Total Current Assets 1,720 Total Current 3,680 people

EQUITY & LIABILITIES

Responsibilities

Current Liabilities 1,290 unsecured bonds with a 6% coupon 1,360 Equity - Ordinary Shares 70 Total Liabilities (50 pence par value) 800 - 1,520 Retained Earnings

Total Liabilities & Equity 3,680 Total Equity 2,320

In each of the last few years, the company, which has been profitable, has paid a dividend of 20 pence per share on its ordinary share capital.

The same dividend rate was announced for the previous fiscal year.

The ordinary shares of the corporation are presently trading at a market price of 650 pence.

At a meeting of Val-U plc's board of directors, the company's Chairman proposes that, in addition to the regular payout of 20 pence per share, shareholders be given a one-time special dividend that is exactly equal to the regular payout.

Instead of a special dividend, the company's Chief Financial Officer (CFO) advises issuing a 1 for 4 bonus issue (i.e. scrip issue). Maintaining the same dividend rate on the higher share capital, according to the CFO, would deliver better long-term incentives for shareholders and have a more favorable influence on the share price.

The Company Secretary claims that issuing extra shares will lower EPS and have a negative impact on the stock price. According to the Corporation Secretary, the company should buyback 3% of its stock at a 10% premium to the market price. According to the Company Secretary, receiving a significant premium over the market price of their shares, as well as improved EPS due to a reduction in the overall number of shares, would provide the best value for shareholders.

A Non Executive Director points out that the company's largest shareholders are sophisticated investors such as investment trusts and ICVCs, and that, in an efficient market, none of the three suggestions would affect shareholder value.

CFF 5

Requirements:

(a) Using the Non Executive Director's comment as a guide, assess the potential impact of each of the three proposals - the special dividend, bonus issue, and share repurchase - on the wealth of a Val-U plc shareholder with 1,000 shares. Make the necessary calculations and remark on your findings.

(8 points)

(b) Discuss the Chairman's, CFO's, and Company Secretary's proposals and perspectives, and remark on how each of their suggested steps might, in practice, provide value to shareholders.

(7 points)

(c) Distinguish between a "investment trust" and a "ICVC," highlighting the key distinctions between the two types of institutions and how they work.