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Required describe the types of incentives which may

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Required: Describe the types of incentives which may encourage managers to focus on current share price at the cost of intrinsic value and explain the actions managers may take to achieve such increases in current share price. The following diagram might be useful but you must explain the diagram in your own words. Avoid long term projects which may have lower cash flows in the early years Increase dividends, share repurchase, increase in leverage, Part B (40%) Trents plc. a manufacturer of sailing boats, has recently discovered a new type of paint which improves movement in turbulent waters. The company is concerned that, if its competitors gain knowledge of this discovery, they will quickly incorporate the paint into their own boats,
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hence Trents plc. does not wish to announce the discovery until Trents plc. has started production. Trents plc. shares currently trade at £6 per share but the company expects the share price to increase to £8 when the market learns about the new paint. Trents plc. has 1 million shares in issue. The company is currently considering investing in a second project which costs £300,000 and has a net present value of £400,000 but can only finance the project using a new issue of equity. As the market is aware of this second project, the current share price reflects the project’s net present value of £0.40 per share. Required a) How many shares will the company need to issue to finance the project? (3 %) 300,000/6 = 50,000 b) What will the share price be if the company undertakes the project after the market learns about the new paint? (20 %) 0.3m (equity issue) + 0.4m (npv) + 2m (increase in value) + 5.6m (value of existing business without project) = 8.3m 8.3m/(1m + 0.05m) = £7.90 c) What will the share price be if the company does not undertake the project? (12 %) 2m (increase in value) + 5.6m (value of existing business without project) = 7.6m 7.6m/1m £7.60 d) Explain whether the company should undertake the project, or not, and why. (5 %) Even though the new shareholders benefit more than existing shareholders the project should be taken because there is a benefit to existing shareholders 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 %)
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