Question 5 GP plc, a pharmaceutical company, is considering the takeover of Fama plc, a company engaged in the same line of activity. Fama plc has 140 million shares in issue, trading at a market price of 300 pence each. The dividend paid by Fama plc has grown from 29 pence 10 years ago, to 39 pence in the year just completed. GP plc expects that, due to managerial and other synergies, they would be able to increase Fama plc's average dividend growth rate by 1 percentage point following the takeover. The companies are all-equity financed, and the beta for both firms is 1.6. The current Treasury bill yield is 2%, and the market risk premium is estimated at 5%. The merger will involve transaction costs of 1% million. Required: (a) Describe THREE economic and financial justifications advanced for the merger and acquisition activity of companies, explaining how each of these might create value. (9 marks) (b) Estimate the post-acquisition value of Fama plc on the basis of the expected approximate dividend growth rate, and evaluate the value gain arising as a result of the takeover. (12 marks) (c) Comment on the research evidence about the extent to which the managers of bidding and selling companies tend to benefit from merger and acquisition activity. (4 marks) (Total 25 marks)