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Question 2 A client company MAYO LTD has recently been approached by a significantly larger company about the possibility of a share for share based

Question 2
A client company MAYO LTD has recently been approached by a significantly larger
company about the possibility of a share for share based takeover of MAYO LTD. The
main rationale behind the proposed takeover is that the larger company can increase
shareholder wealth by capitalising the earnings of MAYO LTD at the larger company's
lower cost of capital.
MAYO LTD's management has opposed this proposal as they do not believe that the full
motivation for the takeover has been disclosed. It plans to defend the company against the
takeover and persuade shareholders not to accept the proposed offer.
Extracts from the most recent audited accounts of MAYO LTD are as follows:
MAYO Ltd
Summary Statement of Financial Position as at 30 June 2022
Assets
Non Current Assets
Land and Buildings
Plant and Equipment
Fixdures and Fintings
Current Assets
Inventories
Trade Receivables
Cash and Cash Equivalents
Total Asseta
Equily and Liabilities
Ordinary shares $2 each
Accumulated Profits
Non Curent Liablities
10% Debentures Redeernable
Current Llabillies
Trade Payables
Short Term Borrowings
Total Equity and Liablitles
Your investigations have revealed the following relevant information:
The most recent dividend declared was 50 cents per ordinary share. This dividend
will be paid on 20 September 2021.
You have calculated that the average compound rate of growth in dividends over
the last five years has been 20%. This growth rate is expected to continue.
MAYO LTD's ordinary shares presently trade at $5.50 cum div.
APC314 Financial Management (Professiona)|
Page 4 of 12
MAYO LTD debentures are presently valued at 90% of their par value.
All interest due on debentures to 30 June 2021 has been paid in full.
Required:
a. Calculate MAYO LTDs Weighted Average Cost of Capital.
b. Critically analyse four reasons why a company's Board of Directors may consider a
takeover bid as hostile.
(12 marks)
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