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  • 20 Marks

FM – Nov 2017 – L3 – Q3 – Financing Decisions and Capital Markets

Calculate theoretical ex-rights price, evaluate shareholder options, discuss EMH implications, and analyze market timing for Peter Plc’s equity financing.

Peter Plc. is a large, listed manufacturing company that is currently considering how best to raise new equity finance. One option is to undertake a public issue of new shares, a course of action recently approved by the shareholders. Alternatively, the company is considering a 1 for 4 rights issue at a 10% discount to the current market price of N5.00 per share.

The company has approached several investment banks regarding the potential new rights issue and public issue. During these discussions, one investment bank stated that the precise timing of a rights issue would be of no consequence. The bank is of the opinion that a public issue of new shares should not be undertaken at the present time. It recommended that if the company wishes to pursue a public issue, it should be deferred for a minimum of six months. The bank explained that, at present, the stock market is significantly undervaluing Peter Plc.’s shares. Consequently, the company would have to issue far more shares to raise the required amount of finance than it would in six months.

The Finance Director of Peter Plc. is uncertain about this and, at a recent board meeting where the matter was discussed, made the following statement:

“According to the Efficient Market Hypothesis, all share prices are correct at all times, with prices moving randomly when new information is publicly announced. The analysts at investment banks are unable to predict future share prices.”

Required:

  1. (a) Calculate the theoretical ex-rights price per share and the value of the rights per existing share, assuming the company chooses this option. (2 Marks)
  2. (b) Discuss the alternative courses of action open to the owner of 500 shares in Peter Plc. as regards the rights issue, in each case, determining the effect on the wealth of the investor. (4 Marks)
  3. (c) Discuss the factors that will influence the actual ex-rights price per share. (4 Marks)
  4. (d) Discuss the meaning and significance of the three forms of the Efficient Market Hypothesis and, with specific reference to these, discuss both the recommendation that the company waits for six months before undertaking a public issue and the Finance Director’s statement. (10 Marks)

(Total 20 Marks)

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  • 14 Marks

AFM – Nov 2016 – L3 – Q1b – Business reorganisation | Valuation of acquisitions and mergers

Calculate and analyze the effects of a proposed spin-off on shareholder wealth and discuss reasons and disadvantages of a spin-off.

Last Chance Limited operates various manufacturing and retail operations throughout Ghana and has 400 million GH¢0.25 ordinary shares in issue. For the year that has just ended, the directors reported total after-tax profits of GH¢300 million and the P/E ratio of the company is 11.4 times.

The company has developed sophisticated computer software over the years and now considers ‘spinning-off’ its subsidiary, Ananse Systems Limited. Ananse Systems Limited has contributed GH¢40 million of the total after-tax profits of Last Chance Limited. After the spin-off, Last Chance Limited’s P/E ratio is expected to reduce to 11.0 times, while Ananse Systems Limited is expected to attract a P/E ratio of either 17 or 18 times.

Required:
i) Suggest THREE reasons why Last Chance Limited may wish to ‘spin-off’ part of its operations. (3 marks)
ii) Discuss THREE possible disadvantages of a ‘spin-off’ for the shareholders of Last Chance Limited. (3 marks)
iii) Calculate the likely effect of the proposed ‘spin-off’ on the wealth of a shareholder holding 10,000 ordinary shares in Last Chance, assuming that Ananse Systems Limited trades at a P/E ratio of 17 times and 18 times. (8 marks)
(Ignore taxation)

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  • 15 Marks

FM – MAY 2018 – L2 – Q5 – Business valuations

Explains the degrees of stock market efficiency and involves calculating the value of a company based on expected earnings and discussing the limitations of using the P/E method for valuation.

a) The directors of Clear Tel Ltd, a private telecommunication company, are considering a proposed resolution for converting the company to a public company and listing its equity stock on the stock exchange. The directors expect that the stock market listing can enhance Clear Tel’s ability to raise large amounts of capital from the public. However, they fear that stock market inefficiencies could have a negative effect on the price of Clear Tel’s equity stock.

Required:

Explain the THREE degrees of stock market efficiency, and how the price of Clear Tel is expected to move in each case.
(6 marks)

b) Restwell Ltd, a hotel leisure company, is currently considering taking over a smaller private limited company, Staygood Ltd. The board of Restwell is in the process of making a bid for Staygood, but first needs to place a value on the company. Restwell has gathered the following data:

The company’s earnings yield is 12%.

Required:

i) As a Finance Manager, calculate the value of the company based on the present value of expected earnings.
(6 marks)

ii) Explain THREE problems associated with using the P/E method for valuing firms.
(3 marks)

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  • 20 Marks

FM – Nov 2017 – L3 – Q3 – Financing Decisions and Capital Markets

Calculate theoretical ex-rights price, evaluate shareholder options, discuss EMH implications, and analyze market timing for Peter Plc’s equity financing.

Peter Plc. is a large, listed manufacturing company that is currently considering how best to raise new equity finance. One option is to undertake a public issue of new shares, a course of action recently approved by the shareholders. Alternatively, the company is considering a 1 for 4 rights issue at a 10% discount to the current market price of N5.00 per share.

The company has approached several investment banks regarding the potential new rights issue and public issue. During these discussions, one investment bank stated that the precise timing of a rights issue would be of no consequence. The bank is of the opinion that a public issue of new shares should not be undertaken at the present time. It recommended that if the company wishes to pursue a public issue, it should be deferred for a minimum of six months. The bank explained that, at present, the stock market is significantly undervaluing Peter Plc.’s shares. Consequently, the company would have to issue far more shares to raise the required amount of finance than it would in six months.

The Finance Director of Peter Plc. is uncertain about this and, at a recent board meeting where the matter was discussed, made the following statement:

“According to the Efficient Market Hypothesis, all share prices are correct at all times, with prices moving randomly when new information is publicly announced. The analysts at investment banks are unable to predict future share prices.”

Required:

  1. (a) Calculate the theoretical ex-rights price per share and the value of the rights per existing share, assuming the company chooses this option. (2 Marks)
  2. (b) Discuss the alternative courses of action open to the owner of 500 shares in Peter Plc. as regards the rights issue, in each case, determining the effect on the wealth of the investor. (4 Marks)
  3. (c) Discuss the factors that will influence the actual ex-rights price per share. (4 Marks)
  4. (d) Discuss the meaning and significance of the three forms of the Efficient Market Hypothesis and, with specific reference to these, discuss both the recommendation that the company waits for six months before undertaking a public issue and the Finance Director’s statement. (10 Marks)

(Total 20 Marks)

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  • 14 Marks

AFM – Nov 2016 – L3 – Q1b – Business reorganisation | Valuation of acquisitions and mergers

Calculate and analyze the effects of a proposed spin-off on shareholder wealth and discuss reasons and disadvantages of a spin-off.

Last Chance Limited operates various manufacturing and retail operations throughout Ghana and has 400 million GH¢0.25 ordinary shares in issue. For the year that has just ended, the directors reported total after-tax profits of GH¢300 million and the P/E ratio of the company is 11.4 times.

The company has developed sophisticated computer software over the years and now considers ‘spinning-off’ its subsidiary, Ananse Systems Limited. Ananse Systems Limited has contributed GH¢40 million of the total after-tax profits of Last Chance Limited. After the spin-off, Last Chance Limited’s P/E ratio is expected to reduce to 11.0 times, while Ananse Systems Limited is expected to attract a P/E ratio of either 17 or 18 times.

Required:
i) Suggest THREE reasons why Last Chance Limited may wish to ‘spin-off’ part of its operations. (3 marks)
ii) Discuss THREE possible disadvantages of a ‘spin-off’ for the shareholders of Last Chance Limited. (3 marks)
iii) Calculate the likely effect of the proposed ‘spin-off’ on the wealth of a shareholder holding 10,000 ordinary shares in Last Chance, assuming that Ananse Systems Limited trades at a P/E ratio of 17 times and 18 times. (8 marks)
(Ignore taxation)

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  • 15 Marks

FM – MAY 2018 – L2 – Q5 – Business valuations

Explains the degrees of stock market efficiency and involves calculating the value of a company based on expected earnings and discussing the limitations of using the P/E method for valuation.

a) The directors of Clear Tel Ltd, a private telecommunication company, are considering a proposed resolution for converting the company to a public company and listing its equity stock on the stock exchange. The directors expect that the stock market listing can enhance Clear Tel’s ability to raise large amounts of capital from the public. However, they fear that stock market inefficiencies could have a negative effect on the price of Clear Tel’s equity stock.

Required:

Explain the THREE degrees of stock market efficiency, and how the price of Clear Tel is expected to move in each case.
(6 marks)

b) Restwell Ltd, a hotel leisure company, is currently considering taking over a smaller private limited company, Staygood Ltd. The board of Restwell is in the process of making a bid for Staygood, but first needs to place a value on the company. Restwell has gathered the following data:

The company’s earnings yield is 12%.

Required:

i) As a Finance Manager, calculate the value of the company based on the present value of expected earnings.
(6 marks)

ii) Explain THREE problems associated with using the P/E method for valuing firms.
(3 marks)

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