Question 1

Company J plans to acquire Company K, an unlisted company whose equity is to be valued using a P/E ratio approach.
A listed company has been identified which is very similar to Company K and which can be used as a proxy.
However, the growth prospects of Company K are higher than those of the proxy.
The Directors of Company J are aware that certain adjustments will be necessary to the proxy company's P/E ratio in order to obtain a more reliable valuation.
The following adjustments have been agreed:
* 20% due to Company K being unlisted.
* 15% to allow for the growth rate difference.
The total adjustment to the proxy p/e ratio is:
  • Question 2

    A company is funded by:
    * $40 million of debt (market value)
    * $60 million of equity (market value)
    The company plans to:
    * Issue a bond and use the funds raised to buy back shares at their current market value.
    * Structure the deal so that the market value of debt becomes equal to the market value of equity.
    According to Modigliani and Miller's theory with tax and assuming a corporate income tax rate of 20%, this plan would:
  • Question 3

    Listed company R is in the process of making a cash offer for the equity of unlisted company S.
    Company R has a market capitalisation of $200 million and a price/earnings ratio of 10.
    Company S has a market capitalisation of $50 million and earnings of $7 million.
    Company R intends to offer $60 million and expects to be able to realise synergistic benefits of $20 million by combining the two businesses. This estimate excludes the estimated $8 million cost of integrating the two businesses.
    Which of the following figures need to be used when calculating the value of the combined entity in $ millions?
  • Question 4

    Company A is a large listed company, with a wide range of both institutional and private shareholders.
    It is planning a takeover offer for Company B.
    Company A has relatively low cash reserves and its gearing ratio of 40% is higher than most similar companies in its industry.
    Which TWO of the following would be the most feasible ways of Company A structuring an offer for Company B?
  • Question 5

    Company A is identical in all operating and risk characteristics to Company B, but their capital structures differ.
    Company B is all-equity financed. Its cost of equity is 17%.
    Company A has a gearing ratio (debt:equity) of 1:2. Its pre-tax cost of debt is 7%.
    Company A and Company B both pay corporate income tax at 30%.
    What is the cost of equity for Company A?