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(a) For many loan agreements, the borrower is required to provide undertakings or guarantees of some kind.
Distinguish between covenants and guarantees. (5 Marks)
(b) State THREE reasons why a company will repurchase its shares and THREE benefits that will accrue to the company for doing so. (6 Marks)
(c) Companies can acquire assets with finance lease instead of buying assets with equity or debt capital.
State SIX main features of a finance lease arrangement. (9 Marks)
(Total 20 Marks)
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Assume a 10% interest on the outstanding loan and 22% Corporate Tax.
Required:
i) Calculate the operating gearing and financial gearing for GGOH. (5 marks)
ii) Assess how these ratios could impact an investor’s decision to invest in GGOH. (5 marks)
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Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
ABC Ltd is a listed company that operates in the Information Technology industry. The company has been experiencing losses for several years now, and its reserves are fast depleting. Its earnings per share have been negative for the past three years. A team of the company’s largest shareholders and some managers are considering acquiring the company in a leveraged buy-out (LBO).
Required:
Discuss THREE advantages and THREE disadvantages of ABC Ltd being acquired in an LBO.
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a) The Directors of Mama Ltd (Mama), a large listed company, are considering an opportunity to
acquire all the shares of Papa Ltd (Papa), a small listed company with a highly efficient
production technology.
Mama has 10 million shares of common stock in issue that are currently trading at GH¢6.00
each. Papa Ltd has 5 million shares of common stock in issue, each of which is trading at
GH¢4.50.
If Papa is acquired and integrated into the business of Mama, the production efficiency of the
combined entity would increase and save the combined business GH¢600,000 in operating
costs each year to perpetuity.
Though Mama operates in the same industry as Papa, its financial leverage is higher than that
of Papa. Mama’s total debt stock is valued at GH¢40 million, and its after-tax cost of debt is
22%. The beta of Mama’s common stock is 1.2. The return on the risk-free asset is 20% and
the market risk premium is 5%.
Required:
Suppose Mama offers a cash consideration of GH¢25 million from its existing funds to the
shareholders of Papa for all of their shares.
i) Calculate the NPV of the acquisition, and advise the directors of Mama on whether to
proceed with the acquisition or not. (8 marks)
ii) Calculate the value of the combined entity immediately after the acquisition. (3 marks)
iii) Suppose Mama would like to acquire all the shares in Papa by offering fresh shares of its
own common stock to the shareholders of Papa. Advise the directors on the appropriate
share exchange ratio based on market price.
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A company plans to invest GH¢7 million in a new product. Net contribution over the next five years is expected to be GH¢4.2 million per annum in real terms. Marketing expenditure of GH¢1.4 million per annum will also be needed. Expenditure of GH¢1.3 million per annum will be required to replace existing assets, and additional investment in working capital, equivalent to 10% of contribution, will be needed at the start of each year. Working capital will be released at the end of the project. The following inflation forecasts are made for the next five years:
The real cost of capital is 6%. All cash flows are in real terms. Ignore tax.
Required:
Calculate the Net Present Value (NPV) of the project and appraise whether it is a worthwhile project.
Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
(a) For many loan agreements, the borrower is required to provide undertakings or guarantees of some kind.
Distinguish between covenants and guarantees. (5 Marks)
(b) State THREE reasons why a company will repurchase its shares and THREE benefits that will accrue to the company for doing so. (6 Marks)
(c) Companies can acquire assets with finance lease instead of buying assets with equity or debt capital.
State SIX main features of a finance lease arrangement. (9 Marks)
(Total 20 Marks)
Find Related Questions by Tags, levels, etc.
Assume a 10% interest on the outstanding loan and 22% Corporate Tax.
Required:
i) Calculate the operating gearing and financial gearing for GGOH. (5 marks)
ii) Assess how these ratios could impact an investor’s decision to invest in GGOH. (5 marks)
Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
ABC Ltd is a listed company that operates in the Information Technology industry. The company has been experiencing losses for several years now, and its reserves are fast depleting. Its earnings per share have been negative for the past three years. A team of the company’s largest shareholders and some managers are considering acquiring the company in a leveraged buy-out (LBO).
Required:
Discuss THREE advantages and THREE disadvantages of ABC Ltd being acquired in an LBO.
Find Related Questions by Tags, levels, etc.
a) The Directors of Mama Ltd (Mama), a large listed company, are considering an opportunity to
acquire all the shares of Papa Ltd (Papa), a small listed company with a highly efficient
production technology.
Mama has 10 million shares of common stock in issue that are currently trading at GH¢6.00
each. Papa Ltd has 5 million shares of common stock in issue, each of which is trading at
GH¢4.50.
If Papa is acquired and integrated into the business of Mama, the production efficiency of the
combined entity would increase and save the combined business GH¢600,000 in operating
costs each year to perpetuity.
Though Mama operates in the same industry as Papa, its financial leverage is higher than that
of Papa. Mama’s total debt stock is valued at GH¢40 million, and its after-tax cost of debt is
22%. The beta of Mama’s common stock is 1.2. The return on the risk-free asset is 20% and
the market risk premium is 5%.
Required:
Suppose Mama offers a cash consideration of GH¢25 million from its existing funds to the
shareholders of Papa for all of their shares.
i) Calculate the NPV of the acquisition, and advise the directors of Mama on whether to
proceed with the acquisition or not. (8 marks)
ii) Calculate the value of the combined entity immediately after the acquisition. (3 marks)
iii) Suppose Mama would like to acquire all the shares in Papa by offering fresh shares of its
own common stock to the shareholders of Papa. Advise the directors on the appropriate
share exchange ratio based on market price.
Find Related Questions by Tags, levels, etc.
A company plans to invest GH¢7 million in a new product. Net contribution over the next five years is expected to be GH¢4.2 million per annum in real terms. Marketing expenditure of GH¢1.4 million per annum will also be needed. Expenditure of GH¢1.3 million per annum will be required to replace existing assets, and additional investment in working capital, equivalent to 10% of contribution, will be needed at the start of each year. Working capital will be released at the end of the project. The following inflation forecasts are made for the next five years:
The real cost of capital is 6%. All cash flows are in real terms. Ignore tax.
Required:
Calculate the Net Present Value (NPV) of the project and appraise whether it is a worthwhile project.
Find Related Questions by Tags, levels, etc.
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