Business reorganisation – NBC Institute

AFM – May 2017 – L3 – Q4b – Financial reconstruction, Business reorganisation

Distinguishing between leveraged buy-out and recapitalization, identifying types of reconstruction, and describing steps in financial reconstruction.

Question

There are many possible reasons why management would wish to restructure a company’s finances. A reconstruction scheme might be agreed upon when a company is in danger of being put into liquidation.

Required:
i) Distinguish between a leveraged buy-out and leveraged recapitalisation. (4 marks)
ii) What are the THREE main types of reconstruction? Describe them briefly. (3 marks)
iii) Describe the procedures that should be followed when designing a financial reconstruction scheme. (3 marks)

Answer

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Tags: Financial reconstruction, Leveraged buy-out, Organizational restructuring, Recapitalization
Level: Level 3

Topic: Business reorganisation, Financial reconstruction
Series: MAY 2017

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.

Question

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)

Answer

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Tags: Corporate finance, P/E Ratio, Shareholder Wealth, Spin-off, Stock Market, Valuation
Level: Level 3

Topic: Business reorganisation, Valuation of acquisitions and mergers
Series: NOV 2016

AFM – May 2016 – L3 – Q5 – Corporate Reconstruction and Reorganisation, Business reorganization

Calculate the maximum possible loss of the company and allocate it between preference and ordinary shareholders.

Question

Additional Information:

The realizable values of the assets are as follows:
- Furniture & Fittings: GH¢27.0m
- Motor Vehicle: GH¢67.5m
- Land & Building: GH¢26.25m
- Stocks: GH¢10.95m
- Debtors: GH¢7.5m
The stated capital of the company is made up as follows:
- 2,000,000 ordinary shares of no par value: GH¢67.5m
- 500,000 15% cumulative preference shares of no par value: GH¢30.0m
The cost of winding up is estimated at GH¢21.3m.
The bank overdraft and 18% debentures are secured by a floating charge on the company’s assets.
The preference dividends and interest on debentures are two years in arrears. However, no provision has been made for these in the financial statement.
The ordinary shareholders have decided to inject GH¢60.0m in consideration for a new issue of equity shares if the capital reconstruction scheme is accepted.
Although it is the company’s policy to amortize intangible assets over five years, the Board of Directors has decided to maintain the Goodwill indefinitely in the books due to the persistent losses, in contravention of the company’s policy. Goodwill has been outstanding since 2009. The current financial state of the company negates the value and existence of the goodwill.
The preference shareholders have indicated their willingness to bear any deficit resulting from the reconstruction in proportion to their interest in the stated capital. In return, their stake would be converted into equity, and they would be permitted to make nominations to key management positions, including chairing the board for the first five years. If these proposals are accepted, the preference shareholders will contribute further equity of GH¢60.0m. They have also agreed to waive 50% of the arrears of dividend and convert the rest into equity.
Any arrears of preference dividends are to form a first charge upon any surplus on winding up.
The original ordinary shareholders have decided to waive any dividend due to them during the first two years in order to put the company on sound financial ground.
The company is expected to improve its cash flow position and commence dividend payments if the additional capital of GH¢120.0m is introduced.

Required:
a) Calculate the amount available if Crave Cottage Industry Limited is liquidated and its distribution.

(7 marks)
b) Calculate the maximum possible loss of Crave Cottage Industry Limited and its allocation to Preference Share Capital and Ordinary Share Capital. (6 marks)
c) Calculate the Bank/Cash balance of Crave Cottage Industry Limited after the reorganization. (2 marks)
d) Calculate the new stated capital for the company after the reorganization. (2 marks)
e) Prepare a Statement of Financial Position of Crave Cottage Industry Limited showing the position immediately after the scheme has been put in place.

(3 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital structure, Loss Allocation, Ordinary Shares, Preference shares, Shareholders
Level: Level 3

Topic: Business reorganisation, Corporate reconstruction and reorganisation
Series: MAY 2016

AFM – May 2018 – L3 – Q4b – Business reorganisation

Estimating equity growth for a management buyout and determining if the growth target is viable.

Question

UTFM Ltd is experiencing financial difficulties, and management is prepared to undertake a buyout. UTFM Ltd is considering selling the business for GH¢50 million. After an analysis, management concluded that the company requires a capital injection of GH¢30 million. A Venture Capitalist has agreed to raise the required funds, providing GH¢8 million at 10% interest and GH¢7 million in equity. Management will provide the remaining funding as equity.

Forecasted Earnings Before Interest and Tax (EBIT) for the next 5 years are as follows:

Corporation tax is charged at 25%, and dividends are expected to be no more than 10% of profits for the first five years. Management forecasts that the value of equity capital is likely to increase by approximately 15% per annum for the next 5 years.

Required:
On the basis of the above forecasts, determine whether management’s estimate that the value of equity will increase by 15% per annum is a viable one.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Buyout, EBIT, Equity Valuation, Growth Estimation, Venture Capital
Level: Level 3

Topic: Business reorganisation
Series: MAY 2018

AFM – May 2017 – L3 – Q4b – Financial reconstruction, Business reorganisation

Distinguishing between leveraged buy-out and recapitalization, identifying types of reconstruction, and describing steps in financial reconstruction.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Financial reconstruction, Leveraged buy-out, Organizational restructuring, Recapitalization
Level: Level 3

Topic: Business reorganisation, Financial reconstruction
Series: MAY 2017

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.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Corporate finance, P/E Ratio, Shareholder Wealth, Spin-off, Stock Market, Valuation
Level: Level 3

Topic: Business reorganisation, Valuation of acquisitions and mergers
Series: NOV 2016

AFM – May 2016 – L3 – Q5 – Corporate Reconstruction and Reorganisation, Business reorganization

Calculate the maximum possible loss of the company and allocate it between preference and ordinary shareholders.

Question

Additional Information:

The realizable values of the assets are as follows:
- Furniture & Fittings: GH¢27.0m
- Motor Vehicle: GH¢67.5m
- Land & Building: GH¢26.25m
- Stocks: GH¢10.95m
- Debtors: GH¢7.5m
The stated capital of the company is made up as follows:
- 2,000,000 ordinary shares of no par value: GH¢67.5m
- 500,000 15% cumulative preference shares of no par value: GH¢30.0m
The cost of winding up is estimated at GH¢21.3m.
The bank overdraft and 18% debentures are secured by a floating charge on the company’s assets.
The preference dividends and interest on debentures are two years in arrears. However, no provision has been made for these in the financial statement.
The ordinary shareholders have decided to inject GH¢60.0m in consideration for a new issue of equity shares if the capital reconstruction scheme is accepted.
Although it is the company’s policy to amortize intangible assets over five years, the Board of Directors has decided to maintain the Goodwill indefinitely in the books due to the persistent losses, in contravention of the company’s policy. Goodwill has been outstanding since 2009. The current financial state of the company negates the value and existence of the goodwill.
The preference shareholders have indicated their willingness to bear any deficit resulting from the reconstruction in proportion to their interest in the stated capital. In return, their stake would be converted into equity, and they would be permitted to make nominations to key management positions, including chairing the board for the first five years. If these proposals are accepted, the preference shareholders will contribute further equity of GH¢60.0m. They have also agreed to waive 50% of the arrears of dividend and convert the rest into equity.
Any arrears of preference dividends are to form a first charge upon any surplus on winding up.
The original ordinary shareholders have decided to waive any dividend due to them during the first two years in order to put the company on sound financial ground.
The company is expected to improve its cash flow position and commence dividend payments if the additional capital of GH¢120.0m is introduced.

Required:
a) Calculate the amount available if Crave Cottage Industry Limited is liquidated and its distribution.

(3 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital structure, Loss Allocation, Ordinary Shares, Preference shares, Shareholders
Level: Level 3

Topic: Business reorganisation, Corporate reconstruction and reorganisation
Series: MAY 2016

AFM – May 2018 – L3 – Q4b – Business reorganisation

Estimating equity growth for a management buyout and determining if the growth target is viable.

Question

Forecasted Earnings Before Interest and Tax (EBIT) for the next 5 years are as follows:

Required:
On the basis of the above forecasts, determine whether management’s estimate that the value of equity will increase by 15% per annum is a viable one.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Buyout, EBIT, Equity Valuation, Growth Estimation, Venture Capital
Level: Level 3

Topic: Business reorganisation
Series: MAY 2018

Topic: Business reorganisation

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AFM – May 2017 – L3 – Q4b – Financial reconstruction, Business reorganisation

Distinguishing between leveraged buy-out and recapitalization, identifying types of reconstruction, and describing steps in financial reconstruction.

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.

AFM – May 2016 – L3 – Q5 – Corporate Reconstruction and Reorganisation, Business reorganization

Calculate the maximum possible loss of the company and allocate it between preference and ordinary shareholders.

AFM – May 2018 – L3 – Q4b – Business reorganisation

Estimating equity growth for a management buyout and determining if the growth target is viable.

AFM – May 2017 – L3 – Q4b – Financial reconstruction, Business reorganisation

Distinguishing between leveraged buy-out and recapitalization, identifying types of reconstruction, and describing steps in financial reconstruction.

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.

AFM – May 2016 – L3 – Q5 – Corporate Reconstruction and Reorganisation, Business reorganization

Calculate the maximum possible loss of the company and allocate it between preference and ordinary shareholders.

AFM – May 2018 – L3 – Q4b – Business reorganisation

Estimating equity growth for a management buyout and determining if the growth target is viable.

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AFM – May 2017 – L3 – Q4b – Financial reconstruction, Business reorganisation

Distinguishing between leveraged buy-out and recapitalization, identifying types of reconstruction, and describing steps in financial reconstruction.

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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.

You're reporting an error for "AFM – Nov 2016 – L3 – Q1b – Business reorganisation | Valuation of acquisitions and mergers"

AFM – May 2016 – L3 – Q5 – Corporate Reconstruction and Reorganisation, Business reorganization

Calculate the maximum possible loss of the company and allocate it between preference and ordinary shareholders.

You're reporting an error for "AFM – May 2016 – L3 – Q5 – Corporate Reconstruction and Reorganisation, Business reorganization"

AFM – May 2018 – L3 – Q4b – Business reorganisation

Estimating equity growth for a management buyout and determining if the growth target is viable.

You're reporting an error for "AFM – May 2018 – L3 – Q4b – Business reorganisation"

AFM – May 2017 – L3 – Q4b – Financial reconstruction, Business reorganisation

Distinguishing between leveraged buy-out and recapitalization, identifying types of reconstruction, and describing steps in financial reconstruction.

You're reporting an error for "AFM – May 2017 – L3 – Q4b – Financial reconstruction, Business reorganisation"

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.

You're reporting an error for "AFM – Nov 2016 – L3 – Q1b – Business reorganisation | Valuation of acquisitions and mergers"

AFM – May 2016 – L3 – Q5 – Corporate Reconstruction and Reorganisation, Business reorganization

Calculate the maximum possible loss of the company and allocate it between preference and ordinary shareholders.

You're reporting an error for "AFM – May 2016 – L3 – Q5 – Corporate Reconstruction and Reorganisation, Business reorganization"

AFM – May 2018 – L3 – Q4b – Business reorganisation

Estimating equity growth for a management buyout and determining if the growth target is viable.

You're reporting an error for "AFM – May 2018 – L3 – Q4b – Business reorganisation"

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