Question 3

a)Discuss and evaluate the motives for mergers and acquisitions that could potentially create value for shareholders.

b)You are provided with the following information regarding Company A:

Over the past four years, Company A's management has increased their dividend per share every year and their dividend per share has grown from 27p to 44p. Company A's shareholders require a return of 15%.

The most recent EPS (earnings per share) of Company A is 250p and the average PER (price earnings ratio) for the sector is 12.

The statement of financial position (the balance sheet) for Company A shows a net asset value of 15m. The property and land however have recently been revalued by independent valuers and have risen by 3m in value over the balance sheet value. In addition, managers are concerned that some of their customers who owe them money will be unable to pay. They estimate they will have to write off 1.5m from accounts receivable. The company has 10 million shares in issue.

Required:

i)Using the information above and a different method for each valuation, calculate three valuations on a per share basis for Company A.

ii)Explain and discuss any differences in the three valuations calculated in part i) above.

iii)Discuss how information signalling may potentially explain why Company A has maintained growth in the dividend paid out to shareholders.