FINANCE
Mock Exam(1)

Required a how many shares will the company need to

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a) How many shares will the company need to issue to finance the project? (3 %) b) What will the share price be if the company undertakes the project after the market learns about the new paint? (20 %) c) What will the share price be if the company does not undertake the project? (12 %) d) Explain whether the company should undertake the project, or not, and why. (5 %) Question 23 - Answer both parts Part A (55 %) i. ‘Mergers may take place because the companies are worth more combined than separate (synergy motive), alternatively management may pursue bids that benefit management at a cost to shareholders (agency motive).’ Develop the above statement giving examples of how both synergistic gains and agency costs arise as a result of mergers and takeovers. (40 %) ii. Give reasons why (i) bidding and (ii) target companies may experience abnormal stock returns around the time of takeover announcements. (15 %) Part B (45 %) Purse plc Wallet plc Current share price £ 6.50 3.40 Current dividend £ 1.10 0.85 Number of shares 1 million 0.5 million Purse plc.’s management has announced a bid to takeover Wallet plc. You estimate that investors currently expect Purse plc’s earnings and dividends to grow steadily at 2% and Wallet plc’s earnings and dividends to grow steadily at 4% per annum. Purse plc’s management have announced that they expect the growth rate for Wallet plc’s earnings and dividends to immediately increase to 5% per annum under their management after takeover. Purse plc’s management also believe that they will be able to reduce Wallet plc's costs by £30,000 per annum indefinitely, as a result of the acquisition. Required a) What is Wallet plc’s cost of capital? (10 %)
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b) Use the cost of capital you have found in (a) to determine the maximum amount Purse plc should be prepared to pay for Wallet plc. (12 %) c) If Purse plc offers Wallet plc‘s shareholders £3.60 per share, what is the gain or loss to Purse plc’s shareholders as a result of the acquisition? (8 %) d) What is the gain or loss to Purse plc’s shareholders if Purse plc offers Wallet plc’s shareholders 1 share in Purse plc for every 2 shares in Wallet plc? (15 %) Section C - You must choose at least one question from this section
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