Reference no: EM132440718

APC308 - Financial Management - University of Sunderland, Hong Kong

Knowledge

1. Critical understanding of the key strategic decisions that a business may have to make and appreciated how accounting and finance can assist in making and evaluating those decisions.

2. Critical understanding of specific analytical skills in key decision areas within strategy and finance at local and international level.

3. Critical understanding of the limitations of the current state of financial theory in making strategic business decisions.

Skills

1. Competence in applying the key valuation concepts and methodologies of financial decision making in order to contribute to the wider decision making of the organization.

Question 1

Company X has 5 million shares in issue and Company Y 15 million. On day 1 the market value per share for Company X is £5.0, and for Company Z is £3.0. On day 2, the management of Company X decides at a private meeting, to make a cash takeover bid for Company Y at a price of £4.00 per share. The takeover will produce large operating savings with a value of £18 million. On day 4, Company X publicly announces an unconditional offer to purchase all the shares of Company Y at a price of £4.00 per share with settlement on day 20. Details of the large savings are not announced and are not public knowledge. On day 12, Company X announces details of the savings, which will be derived from the takeover.

Required:

a. Ignoring tax and the time-value of money between days 1 and 20, and assuming the details given are the only factors having an impact on the share prices of Company X and Y, determine the day 2, day 4, and day 12 share prices of Company X and Company Y if the market is:

1. Semi-Strong Efficient.
2. Strong Form Efficient.

In each of the following circumstances:
i. The purchase consideration is cash as specified above, and
ii. The purchase consideration, decided upon on day 2, and publicly announced on day 4, is one newly issued share of Company Y for each share of Company X.

b. Academics have argued that market efficiency can be defined using three differing strengths; weak form, semi-strong form, and strong form. Critically evaluate the three differing strengths of market efficiency ensuring the response is supported with relevant academic evidence.

Question 2

ABC Ltd has provided the following figures for two investment projects, only one of which may be chosen.

                               Project X                                                    Project Y

                                  £                                                               £

Initial outlay               100,000                                                      100,000

Profit for year   

1                              25,000                                                   15,000

2                              30,000                                                   35,000

3                              35,000                                                   40,000

4                              20,000                                                   10,000

Estimated resale value at end of year 4 30,000                                                   15,000

Profit is calculated after deducting straight line depreciation. The business has a cost of capital of 3%.

Required

a) Calculate for each project
i. Payback
ii. Return on Capital Employed
iii. Net present value (NPV)

b) Critically discuss the merits and limitations of payback and NPV  (Your answer has to be presented in an essay format)

c) Explain which project you would recommend for acceptance

d) Discuss when you would use Weighed Average Cost of Capital and the problems associated with the practical and calculating it.

Question 3

It is 31 January 2019 and the managers of ABC Plc. are considering a change in the company's dividend policy. Earnings per share for 2018 for the company were 29.8p, and the finance director has said that he expects this to increase to 33p per share for 2019. The increase in earnings per share is in line with market expectations of the company's performance. The pattern of recent dividends, which are paid on 31 December is as follows:

The managing director has proposed that 60 per cent of earnings in 2019 and subsequent years should be retained for investment in new product development. It is expected that, if this proposal is accepted, the dividend growth rate will be 10.75 per cent. ABC's cost of capital is estimated to be 15 per cent.

Calculate the share price of ABC in the following circumstances.

(a) The company decides not to change its current dividend policy.

(b) The company decides to change its dividend policy as proposed by the managing director and announces the change to the market.

(c) Does the dividend policy adopted by a company impact upon the market value of that company?

Academic findings within this area have provided conflicting evidence with two distinct theoretical schools of thought; one supporting dividend relevance and the other dividend irrelevance. Critically analyse and evaluate the differing theoretical viewpoints, ensuring the response is developed through incorporating relevant academic research that has been performed within this area.

In this section students should demonstrate knowledge, understanding, and an ability to critically evaluate and analyse the main dividend relevance and irrelevance theoretical viewpoints. The response should be developed through use of a wide range of relevant academic literature, referenced as per Harvard referencing requirements. The inclusion and ability to integrate real-life practical business examples, addressing whether differing companies adopt a dividend relevance or irrelevance standpoint would assist in developing the response in greater depth.