Question 1

1. According to the principles of shareholder value analysis, the value of a business is driven by seven value drivers. Name the value drivers and discuss how each driver affects the value of a business and the wealth of shareholders. Support your discussion with appropriate examples (maximum 500 words).

(Total: 20 Marks)

[Your Answer]

2. Recent financial information relating to Melan plc is as follows;

	000
Profit after tax	2,500
Dividends	1,800

Statement of Financial Position Information
	000
Assets
Non-current assets
Property, plant and equipment	7,500
Intangible assets	700
	8,200
Current assets
Inventories	2,410
Trade receivables	1,000
Cash	170
	3,580
Total assets	11,780
Equity and liabilities
Equity
Ordinary shares of 0.50	3,000
Retained earnings	3,990
	6,990
Non-current liabilities
Borrowing bank loan	3,100
Current liabilities
Trade payables	1,500
Taxation	190
	1,690
Total equity and liabilities	11,780

Melan plc has cost of equity of 10%.

1. Calculate the value of an ordinary share of Melan plc using the net asset basis of valuation (historical basis). (6 Marks)
2. Calculate the value of an ordinary share of Melan plc using the dividend valuation method if;

1. The current level of dividend is expected to remain unchanged for the foreseeable future.
2. The current level of dividend is expected to remain unchanged for three years and then to grow at the rate of 2% per annum in perpetuity. (7 Marks)

3. Comment on the valuation methods you have used and the values you have calculated in parts (a) and (b). (7 Marks)

(Total: 20 Marks)

[Your Answer]

(Total Question 1: 40 Marks)

Question 2

1. Discuss about reasons for one firm to acquire another firm. Support your discussion with appropriate examples (maximum 350 words).

(Total: 14 Marks)

[Your Answer]

2. Gold plc intends to acquire Silver plc. The stock price of Silver plc has risen in anticipation of an acquisition offer from Gold plc. Explain how the increase in the stock price complicates Gold plcs evaluation of Silver plc (maximum 150 words).

(Total: 6 Marks)

[Your Answer]

3. Merlo is analysing the possible acquisition of Eagle. Neither firm has debt. Merlo estimates that the value of the synergistic benefit from acquiring Eagle is 16.5 million. The current market values of Merlo and Eagle are 1.6 billion and 400 million, respectively. Merlo intents to offer 35 per cent of its equity to Eagle. Does it make economic sense for Merlo to proceed with acquisition?

(Total: 5 Marks)

[Your Answer]

4. Ash Equipment is planning acquiring Oliver Machinery. Ash Equipment will pay Oliver's shareholders the current value of their equity in shares of Ash Equipment. Ash Equipment currently has 4,600 shares of equity outstanding at a market price of 31 a share. Oliver Machinery has 1,600 shares outstanding at a price of 38 a share. What is the value per share of the combined firm?

(Total: 5 Marks)

[Your Answer]

(Total Question 2: 30 Marks)

Question 3

1. Define underpricing in the context of security issues and explain why there is a tendency for IPOs to be underpriced (maximum 250 words).

(Total: 10 Marks)

[Your Answer]

2. Red World generates EBIT of 200 million. It currently does not have debt in the capital structure, but it is considering the use of debt and exploring raising either 700 million or 1,500 million. Interest on debt is payable at the rate of 6%. Ignoring taxation and bankruptcy costs and assuming all earnings after interest are paid to shareholders as dividends, which is the most attractive capital structure for Red World? Explain (maximum 250 words).

(Total: 10 Marks)

[Your Answer]

3. Sun plc expects its EBIT to be 200,000 every year forever. It currently has no debt but can borrow at a rate of 10 per cent. The firms WACC is currently 15 per cent and the tax rate is 25 per cent.

1. What is the value of the firm and its cost of equity? (3 Marks)
2. What would be the value of the firm and its cost of equity if it borrows 300,000 and uses the proceeds to repurchase shares? (4 Marks)
3. Comment on the values you have calculated in parts (a) and (b). (3 Marks)

(Total: 10 Marks)

[Your Answer]

(Total Question 3: 30 Marks)