(c) Discuss the factors that might influence whether the initial bid is likely to be accepted by the shareholders of Wragger plc.
第1题:
(c) Acting as an external consultant to Semer, discuss the validity of the proposed strategy to increase gearing, and explain whether or not the estimates produced in (b) above are likely to be accurate. (10 marks)
(c) Report on the proposed adjustment of gearing through the repurchase of ordinary shares
The effect of capital structure on the value of a company is not fully understood.
Increasing the proportion of debt in the capital structure may reduce the overall cost of capital due to the interest on debt being a tax allowable expense. Even if a company is in a non-tax paying position, mixing additional low cost debt with relatively expensive equity might reduce the weighted average cost of capital. In such circumstances the proposed strategy to increase gearing would have some validity. However, increasing gearing can also bring problems. Risk to investors, and therefore the required returns on equity and debt, will increase as gearing increases. Very high levels of gearing might lead to
direct and indirect bankruptcy costs, with a detrimental effect on cash flow and corporate value. Any benefits from increasing the proportion of debt in the capital structure will be to some extent offset as a result of increased risk with high gearing.
The revised estimates of the effect on the cost of capital and value of Semer are not likely to be accurate. Reasons for this include:
(i) The company will not be able to repurchase the necessary shares at their current market value. Approximately £240 million value of equity would need to be repurchased, or more than one third of the existing market value of equity.
As repurchases take place it is likely that the share price will significantly increase.
(ii) The cost of debt is unlikely to remain constant. As more debt is issued lenders will demand a higher interest rate to compensate for the extra risk resulting from higher gearing levels. The cost of equity will also increase with higher gearing. These effects will increase the weighted average cost of capital to a higher level than that estimated.
(iii) The precise market values of debt and equity after the repurchase are unknown, and again will reflect the market attitude
to the new risk of the higher gearing.
The value of the company is likely to be much lower than that estimated, as the weighted average cost of capital is likely to be underestimated.
第2题:
11 Which of the following statements are correct?
1 A company might make a rights issue if it wished to raise more equity capital.
2 A rights issue might increase the share premium account whereas a bonus issue is likely to reduce it.
3 A bonus issue will reduce the gearing (leverage) ratio of a company.
4 A rights issue will always increase the number of shareholders in a company whereas a bonus issue will not.
A 1 and 2
B 1 and 3
C 2 and 3
D 2 and 4
第3题:
(c) Briefly describe five factors to be taken into account when deciding whether to use recruitment consultants.(5 marks)
第4题:
(e) Briefly discuss FOUR initiatives that management might consider in order to further enhance profitability.
(4 marks)
第5题:
(b) Discuss FOUR factors that distinguish service from manufacturing organisations and explain how each of
these factors relates to the services provided by the Dental Health Partnership. (5 marks)
第6题:
(ii) Discuss whether gains and losses that have been reported initially in one section of the performance
statement should be ‘recycled’ in a later period in another section and whether only ‘realised’ gains and
losses should be included in such a statement. (9 marks)
第7题:
(ii) Explain THREE strategies that might be adopted in order to improve the future prospects of Diverse
Holdings Plc. (6 marks)
第8题:
(d) Estimate by how much the bid might be increased without the shareholders of Paxis suffering a fall in their expected wealth, and discuss whether or not the directors of Paxis should proceed with the bid. (5 marks)
(d) The current bid values the shares of Wragger at £19·07 million, compared to the current market value of £15·36 million, a premium of £3·71 million. The expected synergy is £15,570,000. If these data are accurate the bid could be substantially increased without the shareholders of Paxis suffering a fall in their expected wealth. In theory, the bid could be increased by an additional £11,860,000, or 148 pence for each existing Wragger share.
There might also be strategic reasons for undertaking the bid, and the acquisition of Wragger might lead to future options that are not valued by the above analysis.
The proposed acquisition is expected to result in substantial synergy, and to create wealth for the shareholders of both companies. The directors are recommended to proceed with the bid.
第9题:
(ii) Briefly discuss FOUR non-financial factors which might influence the above decision. (4 marks)
第10题:
(ii) Briefly discuss TWO factors which could reduce the rate of return earned by the investment as per the
results in part (a). (4 marks)