Syllabus

A. Role of senior financial adviser in MNC

B. Advanced investment appraisal

C. Corporate reconstruction and re-organisation

D. Acquisition and mergers

E. Treasury and advanced risk management techniques

? D. Acquisition and mergers

2018 Sep Q3

2018 Dec Q1

 2018 Sep Q3

Required:

(a) (i) Estimate the equity value of the combined company and the expected additional value arising from the combination of Selorne Co and Chawon Co.  (6 marks)

(ii) Estimate the share of the gain from the combination created for Chris Chawon and the share of the gain created for Selorne Co’s shareholders and comment on your results.  (6 marks)

(b) Evaluate how reliable the estimates of the synergies for the combined company are likely to be and discuss the factors which may prevent the forecast synergies from being achieved.  (7 marks)

(c) Discuss the factors which Selorne Co’s board will consider when determining which source or sources of finance are chosen to finance a possible cash bid for the share capital of Chawon Co.  (6 marks)

(25 marks)

Selorne Co

Selorne Co is one of the biggest removal companies in Pauland, offering home and business removals. It has a number of long-term contracts with large businesses, although it has not won any new major contracts in the last two years. Selorne Co is listed on Pauland’s stock market for smaller companies. Selorne Co is financed by a mixture of equity and short and long-term debt, but its gearing level is below the average for its sector.

Selorne Co has four executive directors, who each own 20% of the company’s share capital, with the other 20% owned by external shareholders. Selorne Co has paid a constant dividend since it has been listed and its share price has risen slightly over the last three years.

Selorne Co is based in a number of the large cities and towns in Pauland and owns the majority of the sites where it is located. Many of its employees have worked for the company for a long time. Drivers of the lorries used by Selorne Co are required to have a special, heavy vehicles licence. Salary levels at Selorne Co are relatively high compared with other companies in the sector.