Market Efficiency – NBC Institute

FM – May 2023 – L3 – Q7 – Mergers and Acquisitions

Evaluate the share price of Obong plc under different growth scenarios and advise on the takeover bid. Explain EMH and its implications for the market.

Question

Obong plc recently received a takeover bid from Abdul plc. If the bid for Obong plc is successful, it will provide Abdul plc the needed competitive edge in research and development to expand its laboratories into the production of the COVID-19 vaccine.

The shareholders of Obong plc will only accept an offer that meets a required return of 14% on their current shareholdings.

Obong plc recently paid a dividend of N20, and this is expected to grow at a rate of 7% for the foreseeable future.

Required:

a. Estimate the share price of Obong plc today. (2 Marks)

b. If Obong plc accepts the bid from Abdul plc, it is estimated that the new growth rate will rise to 12% for the first 3 years and thereafter stabilize at 7%. Calculate the new share price to the shareholders of Obong plc. (2 Marks)

c. As a financial advisor, recommend to the shareholders of Obong plc whether the offer from Abdul plc should be accepted. (2 Marks)

d. According to Efficient Market Hypothesis (EMH), it is believed that the market would react instantly and accurately to the merger announcement between Obong plc and Abdul plc.
Define briefly the THREE forms of EMH and their implications to the market. (9 Marks)

Answer

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Tags: Dividend growth model, Market Efficiency, Share Price Estimation, Takeover Analysis
Level: Level 3

Topic: Mergers and acquisitions

FM – May 2023 – L3 – Q4 – Financing Decisions and Capital Markets

Evaluate the implications of equity financing decisions, analyze pre-emptive rights, estimate share price, and explore factors affecting price movement.

Question

The directors of Kenny plc wish to make an equity issue to finance an ₦800 million expansion scheme, with an expected net present value of ₦110 million. It is also to re-finance an existing 15% term loan of ₦500 million and pay off a penalty of ₦35 million for early redemption of the loan.

Kenny has obtained approval from its shareholders to suspend their pre-emptive rights and for the company to make a ₦1,500 million placement of shares, which will be at the price of 185 kobo per share. Issue costs are estimated to be 4 per cent of gross proceeds. Any surplus funds from the issue will be invested in commercial paper, which is currently yielding 9 per cent per year.

Kenny’s current capital structure is summarised below:

₦ million
Ordinary shares (25 kobo per share)	800
Share premium	1,120
Revenue reserves	2,310
Total Equity	4,230
15% term loan	500
11% bond	900
Total Capital	5,630

The company’s current share price is 190 kobo, and bond price is ₦102. Kenny can raise bond or medium-term bank finance at 10 per cent per year.

The stock market may be assumed to be semi-strong form efficient, and no information about the proposed uses of funds from the issue has been made available to the public.

Taxation may be ignored.

Required:

a. Discuss FOUR factors that Kenny’s directors should have considered before deciding which form of financing to use. (6 Marks)

b. Explain what is meant by pre-emptive rights, and discuss their advantages and disadvantages. (4 Marks)

c. Estimate Kenny’s expected share price once full details of the placement, and the uses to which the finance is to be put, are announced. (8 Marks)

d. Suggest two reasons why the share price might not move to the price that you estimated in (c) above. (2 Marks)

Answer

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Tags: Equity Issue, Market Efficiency, NPV, Pre-emptive rights, Share Valuation
Level: Level 3

Topic: Financing Decisions and Capital Markets

FM – NOV 2015 – L2 – Q4c – Financial markets

State key assumptions of the Random Walk Theory in financial markets.

Question

State TWO (2) key assumptions of the Random Walk Theory. (3 marks)

Answer

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Tags: Investment, Market Efficiency, Random Walk Theory
Level: Level 2

Topic: Financial markets
Series: NOV 2015

FM – May 2023 – L3 – Q7 – Mergers and Acquisitions

Evaluate the share price of Obong plc under different growth scenarios and advise on the takeover bid. Explain EMH and its implications for the market.

Question

The shareholders of Obong plc will only accept an offer that meets a required return of 14% on their current shareholdings.

Obong plc recently paid a dividend of N20, and this is expected to grow at a rate of 7% for the foreseeable future.

Required:

a. Estimate the share price of Obong plc today. (2 Marks)

c. As a financial advisor, recommend to the shareholders of Obong plc whether the offer from Abdul plc should be accepted. (2 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Dividend growth model, Market Efficiency, Share Price Estimation, Takeover Analysis
Level: Level 3

Topic: Mergers and acquisitions

FM – May 2023 – L3 – Q4 – Financing Decisions and Capital Markets

Evaluate the implications of equity financing decisions, analyze pre-emptive rights, estimate share price, and explore factors affecting price movement.

Question

Kenny’s current capital structure is summarised below:

₦ million
Ordinary shares (25 kobo per share)	800
Share premium	1,120
Revenue reserves	2,310
Total Equity	4,230
15% term loan	500
11% bond	900
Total Capital	5,630

The company’s current share price is 190 kobo, and bond price is ₦102. Kenny can raise bond or medium-term bank finance at 10 per cent per year.

The stock market may be assumed to be semi-strong form efficient, and no information about the proposed uses of funds from the issue has been made available to the public.

Taxation may be ignored.

Required:

a. Discuss FOUR factors that Kenny’s directors should have considered before deciding which form of financing to use. (6 Marks)

b. Explain what is meant by pre-emptive rights, and discuss their advantages and disadvantages. (4 Marks)

c. Estimate Kenny’s expected share price once full details of the placement, and the uses to which the finance is to be put, are announced. (8 Marks)

d. Suggest two reasons why the share price might not move to the price that you estimated in (c) above. (2 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Equity Issue, Market Efficiency, NPV, Pre-emptive rights, Share Valuation
Level: Level 3

Topic: Financing Decisions and Capital Markets

FM – NOV 2015 – L2 – Q4c – Financial markets

State key assumptions of the Random Walk Theory in financial markets.

Question

State TWO (2) key assumptions of the Random Walk Theory. (3 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Investment, Market Efficiency, Random Walk Theory
Level: Level 2

Topic: Financial markets
Series: NOV 2015

Question Tag: Market Efficiency

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FM – May 2023 – L3 – Q7 – Mergers and Acquisitions

Evaluate the share price of Obong plc under different growth scenarios and advise on the takeover bid. Explain EMH and its implications for the market.

FM – May 2023 – L3 – Q4 – Financing Decisions and Capital Markets

Evaluate the implications of equity financing decisions, analyze pre-emptive rights, estimate share price, and explore factors affecting price movement.

FM – NOV 2015 – L2 – Q4c – Financial markets

State key assumptions of the Random Walk Theory in financial markets.

FM – May 2023 – L3 – Q7 – Mergers and Acquisitions

Evaluate the share price of Obong plc under different growth scenarios and advise on the takeover bid. Explain EMH and its implications for the market.

FM – May 2023 – L3 – Q4 – Financing Decisions and Capital Markets

Evaluate the implications of equity financing decisions, analyze pre-emptive rights, estimate share price, and explore factors affecting price movement.

FM – NOV 2015 – L2 – Q4c – Financial markets

State key assumptions of the Random Walk Theory in financial markets.

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FM – May 2023 – L3 – Q7 – Mergers and Acquisitions

Evaluate the share price of Obong plc under different growth scenarios and advise on the takeover bid. Explain EMH and its implications for the market.

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FM – May 2023 – L3 – Q4 – Financing Decisions and Capital Markets

Evaluate the implications of equity financing decisions, analyze pre-emptive rights, estimate share price, and explore factors affecting price movement.

You're reporting an error for "FM – May 2023 – L3 – Q4 – Financing Decisions and Capital Markets"

FM – NOV 2015 – L2 – Q4c – Financial markets

State key assumptions of the Random Walk Theory in financial markets.

You're reporting an error for "FM – NOV 2015 – L2 – Q4c – Financial markets"

FM – May 2023 – L3 – Q7 – Mergers and Acquisitions

Evaluate the share price of Obong plc under different growth scenarios and advise on the takeover bid. Explain EMH and its implications for the market.

You're reporting an error for "FM – May 2023 – L3 – Q7 – Mergers and Acquisitions"

FM – May 2023 – L3 – Q4 – Financing Decisions and Capital Markets

Evaluate the implications of equity financing decisions, analyze pre-emptive rights, estimate share price, and explore factors affecting price movement.

You're reporting an error for "FM – May 2023 – L3 – Q4 – Financing Decisions and Capital Markets"

FM – NOV 2015 – L2 – Q4c – Financial markets

State key assumptions of the Random Walk Theory in financial markets.

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