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$\text{'}$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$\text{'}$s ordinary shares presently trade at $$5\mathrm{.}50$ cum div.

APC$314$ 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$)$