Company A is planning to acquire Company B. Both companies are listed and are of similar size based on market capitalisation No approach has yet been made to Company B's shareholders as the directors of Company A are undecided about the most suitable method of financing the offer Two methods are under consideration a share exchange or a cash offer financed by debt.
Company A currently has a gearing ratio (debt to debt plus equity) of 30% based on market values. The average gearing ratio (debt to debt plus equity) for the industry is 50% Although no formal offer has been made there have been market rumours of the proposed bid. which is seen as favorable to Company A. As a consequence. Company As share price has risen over the past few weeks while Company B's share price has fallen.
Which THREE of the following statements are most likely to be correct?

• A. Company A's gearing will increase following a share exchange.
• B. Based on current share price movements, a share exchange would mean Company A has to issue fewer shares to acquire Company B than it would have done a few weeks ago
• C. Company B's shareholders will be able to participate in the future growth of the combined business if it is a share exchange
• D. Company A's weighted average cost of capital will fall if financing is with debt
• E. The method of finance chosen will not affect the post-acquisition earning per share of the combined business

A company intends to sell one of its business units. Company W, by a management buyout (MBO). A selling price of S200 million has been agreed.
The managers are discussing with a bank and a venture capital company (VCC) the following financing proposal.

The VCC requires a minimum return on its equity investment In the MBO of 35% a year on a compound basis over 5 years.
What is the minimum total equity value of Company W in 5 years time in order to meet the VCC's required return?
Give your answer to one decimal place.

SUP is a large supermarket chain. It produces many 'own brand' goods in Country S where the parent company is located. These goods are sold in SUP's supermarkets in Country S as well as being sold at a 'transfer price' to SUP companies located in foreign countries for sale in the SUP supermarkets located in that country.
Which of the following factors is the most important for SUP from a lax planning and compliance viewpoint when setting prices for the 'own brand' goods sold to other group companies'?

• A. The price should be much lower than average if the group company that is purchasing the goods has a higher marginal tax rate than the SUP parent company.
• B. Complying with tax thin capitalisation regulations that apply in both tax jurisdictions.
• C. The price should be the same as the price that would be charged by SUP to other, independent, supermarkets that are located in the same foreign country as the group company that requires the goods.
• D. The price should be higher than for other group companies if the group company that is purchasing the goods has a higher marginal tax rate than the SUP parent company.

A listed company is planning to raise $21.6 million to finance a new project with a positive net present value of $5 million. The finance is to be raised via a rights issue at a 10% discount to the current share price. There are currently 100 million shares in issue, trading at $2.00 each.
Taking the new project into account, what would the theoretical ex-rights price be?
Give your answer to two decimal places.