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a. Synergy
Every merger has its own unique reasons why the combining of two companies is a good business decision. The underlying principle behind mergers and acquisitions ( M & A ) is simple: 2 + 2 = 5. The value of Company A is Sh. 2 billion and the value of Company B is Sh. 2 billion, but when we merge the two companies together, we have a total value of Sh. 5 billion. The joining or merging of the two companies creates additional value which we call "synergy" value.
b. Bargain Purchase
It may be cheaper to acquire another company than to invest internally. For example, suppose a company is considering expansion of fabrication facilities. Another company has very similar facilities that are idle. It may be cheaper to just acquire the company with the unused facilities than to go out and build new facilities on your own.
c. Diversification
It may be necessary to smooth-out earnings and achieve more consistent long-term growth and profitability. This is particularly true for companies in very mature industries where future growth is unlikely. It should be noted that traditional financial management does not always support diversification through mergers and acquisitions. It is widely held that investors are in the best position to diversify, not the management of companies since managing a steel company is not the same as running a software company.
d. Short Term Growth
Management may be under pressure to turnaround sluggish growth and profitability. Consequently, a merger and acquisition is made to boost poor performance.
e. Undervalued Target
The Target Company may be undervalued and thus, it represents a good investment. Some mergers are executed for "financial" reasons and not strategic reasons. A company may, for example, acquire poor performing companies and replace the management team in the hope of increasing depressed values.
f. Increasing Earnings per Share – Some acquisitions that offer no evident economic gains nevertheless produce several years of rising earnings per share.
Kavungya answered the question on April 14, 2021 at 11:22
- State and explain the types of mergers.(Solved)
State and explain the types of mergers.
Date posted: April 14, 2021. Answers (1)
- XYZ ltd. is considering three possible capital projects for next year. Each project has a 1 year life, and
project returns depend on next years state...(Solved)
XYZ ltd. is considering three possible capital projects for next year. Each project has a 1 year life, and
project returns depend on next years state of the economy. The estimated rates of return are shown below.
a. Find each project expected rate of return, variance, standard deviation and coefficient of
variation.
b. Compute the correlation coefficient between
i. A and B
ii. A and C
iii. B and C
c. Compute the expected return on a portfolio if the firm invests equal wealth on each asset.
d. Compute the standard deviation of the portfolio.
Date posted: April 13, 2021. Answers (1)
- The risk free rate is 10% and the expected return on the market portfolio is 15%. The expected returns for 4
securities are listed below together...(Solved)
The risk free rate is 10% and the expected return on the market portfolio is 15%. The expected returns for 4
securities are listed below together with their expected betas.
a. On the basis of these expectations, which securities are overvalued? Which are undervalued?
b. If the risk-free rate were to rise to 12% and the expected return on the market portfolio rose to 16%,
which securities would be overvalued? which would be under-valued? (Assume the expected returns
and the betas remain the same).
Date posted: April 13, 2021. Answers (1)
- Securities D, E and F have the following characteristics with respect to expected return, standard deviation
and correlation coefficients.
Compute the expected rate of return and standard...(Solved)
Securities D, E and F have the following characteristics with respect to expected return, standard deviation
and correlation coefficients.
Compute the expected rate of return and standard deviation of a portfolio comprised of equal investment in
each security.
Date posted: April 13, 2021. Answers (1)
- Security returns depend on only three risk factors-inflation, industrial production and the aggregate degree of
risk aversion. The risk free rate is 8%, the required rate...(Solved)
Security returns depend on only three risk factors-inflation, industrial production and the aggregate degree of
risk aversion. The risk free rate is 8%, the required rate of return on a portfolio with unit sensitivity to
inflation and zero-sensitivity to other factors is 13.0%, the required rate of return on a portfolio with unit
sensitivity to industrial production and zero sensitivity to inflation and other factors is 10% and the required
return on a portfolio with unit sensitivity to the degree of risk aversion and zero sensitivity to other factors is
6%. Security i has betas of 0.9 with the inflation portfolio, 1.2 with the industrial production and-0.7 with
risk bearing portfolio—(risk aversion)
Assume also that required rate of return on the market is 15% and stock i has CAPM beta of 1.1
Required:
Compute security i's required rate of return using
a. CAPM
b. APT
Date posted: April 13, 2021. Answers (1)
- Assume that the risk free rate of return is 8%, the market expected rate of return is 12%. The standard deviation of the market return...(Solved)
Assume that the risk free rate of return is 8%, the market expected rate of return is 12%. The standard deviation of the market return is 2% while the covariance of return for security A and the market is 2%.
What is the required rate of return on Security A?
Date posted: April 13, 2021. Answers (1)
- What are efficient portfolios?(Solved)
What are efficient portfolios?
Date posted: April 13, 2021. Answers (1)
- Four assets have the following distribution of returns.a. Compute the expected return and standard deviation of each asset.b. Compute the covariance of asseti. A and...(Solved)
Four assets have the following distribution of returns.
Required.
a. Compute the expected return and standard deviation of each asset.
b. Compute the covariance of asset
i. A and B
ii. B and C
iii. B and D
c. Compute the correlation coefficient of the combination of assets in b above.
Date posted: April 13, 2021. Answers (1)
- Consider two investments A & B each having the following characteristics:
Compute the portfolio standard deviation if the correlation coefficient between the assets is
a. 1
b. 0
c....(Solved)
Consider two investments A & B each having the following characteristics:
Investment Expected Return (%) Proportion
A 20 2/3
B 40 1/3
REQUIRED:
Compute the portfolio standard deviation if the correlation coefficient between the assets is
a. 1
b. 0
c. -1
Date posted: April 13, 2021. Answers (1)
- Consider two investments, A and B each having the following investment characteristics;
Compute the expected return of a portfolio of the two assets.(Solved)
Consider two investments, A and B each having the following investment characteristics;
Investment Expected Return (%) Proportion
A 10 2/3
B 20 1/3
Required.
Compute the expected return of a portfolio of the two assets.
Date posted: April 13, 2021. Answers (1)
- Define the term portfolio.(Solved)
Define the term portfolio.
Date posted: April 13, 2021. Answers (1)
- A piece of equipment requiring the investment of 2.2 million is being considered by Charo Foods Ltd. The equipment has a ten-year useful life and...(Solved)
A piece of equipment requiring the investment of 2.2 million is being considered by Charo Foods Ltd. The equipment has a ten-year useful life and an expected salvage value of Sh 200,000. The company uses the straight-line method of depreciation for analyzing investment decisions and faces a tax rate of 40%. For simplicity assume that the depreciation method is acceptable for tax purposes.
A pessimistic forecast projects cash earnings before depreciation and taxes at Sh 400,000 per year compared with an optimistic estimate of Sh 500,000 per year. The probability associated with the pessimistic estimate is 0.4 and 0.6 for the optimistic forecast. The company has a policy of using a hurdle rate of 10% for replacement investments, 12% (its cost of capital) for revenue expansion investments into existing product lines and 15% projects involving new areas or new product lines.
REQUIRED:
(a) Compute the expected annual cash flows associated with the proposed equipment investments.
(b) Would you recommend acceptance of this project if it involved expansion of sales for an existing product?
(c) Would it be acceptable if it was for the replacement of equipment with a book value of Sh 200,000 at the end of the tenth year but which could be sold at that time for only Sh 40,000?
(d) Discounted cash flow methods were developed for idealized settings of complete and perfect capital, factor and commodity markets. Explain what complications arise when an attempt is made to apply these methods in real life markets that are neither complete nor perfect.
Date posted: April 13, 2021. Answers (1)
- The Mentala Plastics Company has been dumping in the local council waste collection
centre some 30,000 Kg. of unusable chemicals each year. In addition to being...(Solved)
The Mentala Plastics Company has been dumping in the local council waste collection
centre some 30,000 Kg. of unusable chemicals each year. In addition to being an
eyesore, the residents of a nearby estate have started complaining of bad odour
emanating from the dump and suspect that the company is to blame.
The company has received information that these chemicals can be recycled at relatively little
cost. The equipment to do it is however rather expensive and, in addition, the chemicals
recovered are of a relatively poor quality. Investigations have shown that these chemicals can
be sold to another firm at an average price of Sh.35 per Kg. The direct cost of recycling has
been calculated at Sh.15 per Kg. but this is before depreciation and taxes.
The equipment for this process has an expected life of 10 years and a current cost of Sh.2 million. At the
end of the ten years, it will be virtually worthless.
For financial analysis, the company uses the straight line method of depreciation and an average tax rate of
40%. It has a required rate of return of 15%.
REQUIRED:
i. Compute the project's net present value (N.P.V).
ii. Compute the payback period and the accounting rate of return.
iii. Compute the internal rate of return (IRR).
iv. Should this project be undertaken? Explain.
Are there any other important matters that the company should consider in evaluating this project?
Date posted: April 13, 2021. Answers (1)
- Explain the concept of "rate of interest" in the context of financial decisions.(Solved)
Explain the concept of "rate of interest" in the context of financial decisions.
Date posted: April 13, 2021. Answers (1)
- The Zeda Company Ltd. is considering a substantial investment in a new production process. From a
variety of sources, the total cost of the project has...(Solved)
The Zeda Company Ltd. is considering a substantial investment in a new production process. From a
variety of sources, the total cost of the project has been estimated at Sh.20 million. However, if the
investment were to be increased to Sh.30 million, the productive capacity of the plant could be substantially
increased. Due to the nature of the process, it would be exorbitantly expensive to increase capacity once the
equipment is installed.
Once of the problems facing the company is that there is a considerable degree of uncertainty regarding
demand for the product. After some research which has been conducted jointly by the marketing and
finance departments, some data has been produced. These are shown below:
REQUIRED:
(a) Prepare a statement which clearly indicates the financial implications of each of the two alternative
investment scenarios.
(b) Comment on other matters which the management should take into account before reaching
the final decision.
PVIFA: 10% 5 years = 3.79
PVIFA: 10% 10 years = 6.14
PVIFA: 10% 10 years = 0.62
Date posted: April 13, 2021. Answers (1)
- State the disadvantages of utility approach.(Solved)
State the disadvantages of utility approach.
Date posted: April 13, 2021. Answers (1)
- State the advantages of utility approach.(Solved)
State the advantages of utility approach.
Date posted: April 13, 2021. Answers (1)
- State the demerits of decision tree.(Solved)
State the demerits of decision tree.
Date posted: April 13, 2021. Answers (1)
- State the merits of decision tree.(Solved)
State the merits of decision tree.
Date posted: April 13, 2021. Answers (1)
- A project has the following cash flows
The projects initial cash outlay is Sh 100,000 with a cost of capital of 12%.
Required:
Determine:
(a) The projects expected monetary...(Solved)
A project has the following cash flows
The projects initial cash outlay is Sh 100,000 with a cost of capital of 12%.
Required:
Determine:
(a) The projects expected monetary value (EMV)
(b) The projects NPV
Date posted: April 13, 2021. Answers (1)