SPECIAL INSTRUCTIONS TO STUDENTS:
1. This paper is an open book examination.
2. ANSWER ALL QUESTIONS.
3. Marks are as indicated next to each question in brackets.
4. All workings must be clearly shown.
5. Max word count for PART B: 300 words for each question.
6. All answers must be type-written and uploaded via Turnitin.
7. By taking this assessment you certify and confirm that the answers provided are entirely yours without any kind of interference by any third party. You are fully aware and informed that Faculty might call for an oral viva in any case of potential academic misconduct. Academic misconduct will be heavily penalised as per University Regulations.
This question paper contains 4pages (cover included).
Part A:You must answer both the following two questions.
QUESTION 1
You are advising Holiday Ray, which has just made an un-solicited takeover offer for Timeless Horizons (TH). You’ve been able to obtain the following information from TH’s accountant: (i) current free cash flow of £1,000,000, growing at 5% annually in perpetuity, (ii) equity beta of 2, (iii) debt beta of 0.5, (iv) the leverage is 75%, (v) risk-free rate of 3%, (vi) market risk premium of 6%, and (vii) tax rate of 30%.
Required
(a) Calculate the fair value of TH using WACC and APV (assume that the tax shield is discounted using the return on assets and that the firm’s annual tax shield grows also at 5% per year). Please show your calculations.
(12.5marks)
An investment banker approaches TH about replacing entirely the firm’s existing debt with preferred stock. The preferred stock would occupy the same place in the capital structure as the debt it replaced. The banker says that the required rate of return on preferred stock would be 4%. Suppose the banker is correct.
Required
(b) Would this be a violation of the Modigliani-Miller theorems? Explain.
(12.5 marks)
(Total marks 25)
QUESTION 2
On 1st Jan 2019, Buyer acquired all of the shares in Target in exchange for 50,000 of its own newly issued shares, the fair value of which is 21 per share.
Included within Target's tangible fixed assets is property with a net book value of 100, which originally cost 250. This fixed asset (which is depreciated on a straight-line basis over 10 years) has been appraised with a fair value of 400. No revision has been made to its overall estimated useful life.
Over the years, Target has been able to build up valuable IPs. Experts value them at 350 at Jan 2019.
The company uses the partial goodwill method.
Required:
1) Calculate the residual life of the Target property that has been revalued at 400.
(5 marks)
2) Using the information above prepare a consolidated BS as of 1 Jan 2019 under the Purchase method.
(10 marks)
3) Repeat part 2) for the case where Buyer pays 787.5 in cash (financed by new issue of debt) in order to acquire 75% of the shares of Target.
(10 marks)
(Total marks 25)
Part B:You must answer all the following four questions in the section
QUESTION 3
Explain what the Free Rider dilemma is in M&A and how it could be solved.
(25marks)
QUESTION 4
Explain what an LBO is, how a typical deal’s debt is structured (kind of debt, lenders, costs, etc…).
How would you proceed to calculate the debt capacity of a Target company?
Explain the difference between a Subordinated Secured Loan issued at Operating Company level and a Senior Secured Bond issued at Holding Company level.
Which one is more subordinated?
(25marks)
QUESTION 5
List and carefully explain at least 5 forms of mergers.
(25marks)
QUESTION 6
Explain the difference between a Fixed Price Collar, a Variable Exchange Ratio Collar and a Fixed Exchange Ratio Collar.
Compare these strategies to equivalent plain-vanilla European options (be explicit and clear in showing the different legs of the strategies).
(25marks)
TOTAL MARKS 100
MARKS AWARDED OUT OF 100
END OF EXAM
