Strategic Corporate finance
Part B
It is 31 January 2019 and the managers of Primrose are considering a change in the company’s dividend policy. Earnings per share for 2018 for the company were 68p, and the finance director has said that he expects this to increase to 72p 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 70 per cent of earnings in 2018 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 3.50 per cent. Primrose’s cost of capital is estimated to be 5 per cent.
Required:
Calculate the share price of Primrose in the following circumstances.
1. a) The company decides not to change its current dividend policy. (9 marks)
2. b) The company decides to change its dividend policy as proposed by the managing director
and announces the change to the market. (6 marks)
Required:
(b). The question of the effect of dividends on share prices has been a controversial one for many years. Two differing theoretical schools of thought are prevalent within this area, one supporting dividend relevance, and the other providing support for dividend irrelevance. Critically evaluate the two schools of thought; ensuring the evaluation is developed with relevant academic evidence.
(35 marks)
In this section students should demonstrate both understanding and knowledge of the dividend relevance and irrelevance theoretical viewpoints. The discussion / evaluation should be supported with relevant empirical research that has been performed within this area and should be referenced accordingly. 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 and detail.
Total for Part B – 50 marks
Part C
The managing directors of Hazard PLC are considering what value to place on Bale PLC, a company they are planning to take over in the near future. Hazard PLC’s share price is currently £3.68, and the company’s earnings per share stand at 21p. Hazard’s weighted average cost of capital is 8%.
The board estimates that annual after-tax synergy benefits resulting from the takeover will be £2m, that Bale’s distributable earnings will grow at an annual rate of 3% and that duplication will allow the sale of £4.5m of assets, net of corporate tax (currently standing at 25%), in a year’s time. Information relating to Bale PLC:
Required:
(a) Given the information above, calculate the value of Bale PLC using the following valuation methods:
i. Price / Earnings Ratio. (using Hazard’s P/E ratio) (5 marks)
ii. Dividend valuation method. (5 marks)
iii. Discounted cash flow method. (5 marks)
Required:
(b). Mergers and acquisitions are seen as playing a pivotal role within the field of strategic corporate finance as a mechanism of external growth, where internal growth opportunities may be restricted. An extensive and wide body of academic research is evident within this area although provides conflicting evidence as to whether mergers and acquisitions actually do indeed benefit the acquiring firm’s shareholders. Critically evaluate whether mergers and acquisitions are aligned with the fundamental financial objective of shareholder wealth maximization, ensuring the response incorporates a range of relevant academic findings.
(35 marks)
Within this section of the assessment students should demonstrate understanding, knowledge, and an ability to critically evaluate whether merger and acquisition activity is aligned with the fundamental corporate financial objective of shareholder wealth maximization. The evaluative element of the assessment should clearly demonstrate evidence of wider reading that is sensibly and logically integrated and in-text referenced within the work as per Harvard referencing requirements. Although the main focus of the response should address the impact of mergers and acquisitions upon the acquiring company’s shareholders wealth, other concepts that can be considered include the motives for mergers, how mergers are financed, the merger process, and the key beneficiaries of mergers. The response could also incorporate practical, real-life business examples, addressing whether mergers have been successfully implemented, along with accessing empirical findings regarding who benefits from the merger process.
Total for Part C – 50 marks