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Mfi 602 Mergers And Acquisition Weekend Question Paper
Mfi 602 Mergers And Acquisition Weekend
Course:Masters Of Science In Finance
Institution: Kca University question papers
Exam Year:2014
UNIVERSITY EXAMINATIONS: 2013/2014
EXAMINATION FOR THE MASTERS OF SCIENCE (MSC) FINANCE AND
INVESTMENT/ACCOUNTING/ECONOMICS
MFI 602 MERGERS AND ACQUISITION WEEKEND
DATE: AUGUST, 2014
TIME: 3 HOURS
INSTRUCTIONS: Answer Question One and Any Other Three Questions
QUESTION ONE (31 MARKS)
i) Explain the main benefits of mergers and acquisitions.
(4 Marks)
ii) Explain the main types of synergies that can be enjoyed through mergers and acquisitions.
(4 Marks)
iii)
Consider two firms Uwezo and Habari limited whose activities are unrelated. Uwezo is a
construction company whereas Habari is a company operating in telecommunication industry.
To evaluate the effect of a merger between two companies consider the following data.
Uwezo Habari
Market value of debt sh m 90 110
Face value of debt sh m 60 80
Debt maturity in years 4 4
Standard deviation of firm % 30 40
Both firms have a zero coupon bond and both bonds mature on the same date four years from
now. If the merger is effected the bondholders maintain an identical claim (same face value,
maturity and seniority) which is guaranteed by the new firm. Since the firms are unrelated the
correlation between the company’s cash flows is zero. The risk free rate is 8%.
Required:
1
a) What type of merger is expected in this case?
(2 Marks)
b) What motivates firms to engage in such a merger?
(3 Marks)
c) Calculate the benefits of the merger for equity holders and advise if its beneficial to
them or not using the concept of option valuation.
(18 Marks)
QUESTION TWO (23 MARKS)
a) Explain the main stages of merger analysis.
(6 Marks)
b) Explain the concept of value gaps in mergers and give four reasons why value gaps arise in
mergers and acquisition process.
c)
(12 Marks)
There are several explanations which attempt to describe how to predict whether a company is
an easy target for the purpose of acquisition by the predator. Explain three theories that are
used to do this prediction
(5 Marks)
QUESTION THREE (23 MARKS)
Orange limited and Rainbow limited are companies operating in the same line of business. In the past
few years Orange limited has experienced stiff competition from Rainbow limited to an extent that
Orange limited is now contemplating acquiring Rainbow limited to consolidate its market share.
The following financial data is available about the two companies;
Orange limited
Rainbow limited
Annual sales (Sh millions) 750 90
Net income ( Sh millions) 60 7.5
Ordinary shares 15 3.0
Earnings per share Sh 8.0 5.0
Market price per share Sh 80 20
Both companies are in the 30% income tax bracket
Required;
i)
Maximum exchange ratio Orange Limited should agree to if it expects no dilution in earnings
per share.
ii)
Premium the shareholders of Rainbow limited would receive at the exchange ratio obtained in
b(i) above.
iii)
(3 Marks)
(4 Marks)
Orange limited’s post acquisition merger EPS if the two companies agree on an offer price of
Sh 24.
(8 Marks)
2
iv)
Orange Limited’s EPS if every 50 shares of Rainbow limited are exchanged for one 12%
debenture of Sh 1000 par value.
(8 Marks)
QUESTION FOUR (23 MARKS)
a)
Explain the defense tactics available to managers of a target company in order to fend off a hostile
takeover attempt.
b)
(8 Marks)
Kubwa limited wishes to acquire Ndogo limited. The directors of Kubwa limited wish to justify the
acquisition on the grounds that it will increase the shareholders wealth. The supporting evidence
produced by the directors of Kubwa limited is summarized below ;
Kubwa limited
Sh 000
Ndogo limited
Sh 000
Operating profit 12,400 5,800
Interest payable ( 4,431) ( 2,200)
Profit before tax 7,969 3,600
( 2,789) ( 1,260)
ordinary shareholders 5,180 2,340
Earnings per share (pre acquisition) Sh 14.80 Sh 29.25
Sh 222 Sh 322
Sh 240 Sh 360
Tax
Earnings attributable to
Market price per share ( pre acquisition)
Estimated market price per share
Post Acquisition
Kubwa limited would issue three of its ordinary shares for every two ordinary shares in Ndogo
limited in consideration of the acquisition of Ndogo limited.
Required;
i)
Show calculations of how the directors of Kubwa Ltd. arrived at their estimates of post
acquisition value and if you do not agree with these estimates produce revised estimates of
the post acquisition values.
ii)
(10 Marks)
If the acquisition is contested by Ndogo limited determine the maximum price that Kubwa
limited would off without reducing the wealth of its shareholders.
(5 Marks)
3
QUESTION FIVE (23 MARKS)
a)
Some mergers are motivated by the need to reduce overall financial risk of the enlarged
company without necessarily maximizing shareholders wealth. Discuss the above statement
clearly supporting your argument with an appropriate mathematical proof.
b)
(15 Marks)
Consider two firms A and B that wish to merge with a view of minimizing the risk of the
enlarged company. The variance of assets of A is 200 and variance of assets of is 10. Suppose
the covariance between the two companies is -0.5, what proportions would you advise of A and
B that should form the enlarged company in order to minimize overall risk of the new firm?
(8 Marks)
QUESTION SIX (23 MARKS)
a)
Explain the alternative methods used to value shares of an acquiree company during a merger.
(6 Marks)
b) Highlight the advantages and disadvantages of growth by acquisition. (6 Marks)
c) Explain the main forms of consideration in respect of mergers and acquisitions. (6 Marks)
d) Differentiate between vertical and horizontal mergers. (5 Marks)
4
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