Company W has received an unwelcome takeover bid from Company B. The offer is a share exchange of 3 shares in Company B for 5 shares in Company Wora cash alternative of $5.70 for each Company W share.
Company B is approximately twice the size of Company W based on market capitalisation. Although the two companies have some common business interested the main aim of the bid is diversification for Company B.
Company W has substantial cash balances which the directors were planning to use to fund an acquisition.
These plans have not been announced to the market.
The following share price information is relevant.

Which of the following would be the most appropriate action by Company W's directors following receipt of this hostile bid?

• A. Refer the bid to the country's competition authorities.
• B. Pay a one-off special dividend.
• C. Write to shareholders explaining fully why the company's share price is under valued.
• D. Change the Articles of Association to increase the percentage of shareholder votes required to approve a takeover.

The directors of a financial services company need to calculate a valuation of their company's equity in preparation for an upcoming initial Public Offering (IPO) of shares. At a recent board meeting they discussed the various methods of business valuation.
The Chief Executive suggested using a Price-earing (P./E) method of valuation, but the finance Director argued that a valuation based on forecast cash flows to equity would be more appropriate.
Which THREE of the following are advantages of valuation based on forecast cash flows to equity, compared to a valuating using a price earnings methods?

• A. It incorporates the time value of money.
• B. Using cash is theoretically superior to using profits in a valuation calculation.
• C. It give on estimate of the likely shareholder value that will be created.
• D. The calculations are much simpler.
• E. It avoids the problem of having to forecast a sustainable level of future growth.

A private company manufactures goods for export, the goods are priced in foreign currency B$.
The company is partly owned by members of the founding family and partly by a venture capitalist who is helping to grow the business rapidly in preparation for a planned listing in three years' time.
The company therefore has significant long term exposure to the B$.
This exposure is hedged up to 24 months into the future based on highly probable forecast future revenue streams.
The company does not apply hedge accounting and this has led to high volatility in reported earnings.
Which of the following best explains why external consultants have recently advised the company to apply hedge accounting?

• A. To ensure that the venture capitalist receives regular annual returns on its investment.
• B. To fully adopt IFRS in preparation for listing the company.
• C. To make it easier for the market to value the business when it is listed on the Stock Exchange.
• D. To provide a more appropriate earnings figure for use in calculating the annual dividend.

The ex div share price of a company's shares is $2.20.
An investor in the company currently holds 1,000 shares.
The company plans to issue a scrip dividend of 1 new share for every 10 shares currently held.
After the scrip dividend, what will be the total wealth of the shareholder?
Give your answer to the nearest whole $.

A company wishes to raise additional debt finance and is assessing the impact this will have on key ratios.
The following data currently applies:
* Profit before interest and tax for the current year is $500,000
* Long term debt of $300,000 at a fixed interest rate of 5%
* 250,000 shares in issue with a share price of $8
The company plans to borrow an additional $200,000 on the first day of the year to invest in new project which will improve annual profit before interest and tax by $24,000.
The additional debt would carry an interest rate of 3%.
Assume the number of shares in issue remain constant but the share price will increase to $8.50 after the investment.
The rate of corporate income tax is 30%.
After the investment, which of the following statements is correct?

• A. Interest cover will rise; P/E ratio will fall.
• B. Interest cover will fall; P/E ratio will fall.
• C. Interest cover will rise; P/E ratio will rise.
• D. Interest cover will fall; P/E ratio will rise.