Page 22 - SCS May 2018 - Day 2 Suggested Solutions

CIMA MAY 2018 – STRATEGIC CASE STUDY

Taking both of these things into account would reasonably have led to the conclusion that raising
more debt without first issuing more equity would have been undesirable. Hence, perhaps, the
advice to raise both which has kept our gearing at a level very similar to that at the end of 2017.

In the event, during the year to April 2018 HomeVideo increased its debt by 95%, without further
equity being raised, taking its gearing level up from 52% to 65%. This may suggest that we are
neither nearing our debt capacity nor beyond our optimum gearing level.

(Tutorial note: it would of course be possible to calculate the change in WACC which has occurred
from 2017 to 2018 but we do not have the necessary information to do that. However, even if we
did have the information any change in WACC could not be validly ascribed solely to the gearing
effects.)

EXERCISE 3

Email

To: Chet Nolan, Chief Executive
From: Senior manager
Subject: Bid defences

There are a number of things a company can do to in an attempt to protect itself from being
taken over, which are generally referred to as bid defences. These bid defences split into two
broad categories: those that must be in place before any bid occurs (Pre Bid defences) and those
that can be put in place after a bid has been made (Post Bid defences).

Pre Bid defences

Communicate effectively with shareholders

This involves continual communication with shareholders to keep them up to date on what the
company is doing. It would generally involve the company appointing a specialist public relations
officer who would be in continual communication with the company’s stockbrokers, financial
analysts, institutional investors and the press, to ensure that all interested parties are fully
informed about the company’s plans and performance.

The idea is to ensure that all the participants in the market feel involved and valued by the
company and that they are happy with the performance and intended future strategy. If they are
happy with the way the company is being run under the current management, they will be less
likely to want a change in that management.

It is a long term strategy and will only be effective if it has been done over a period of years.

78 KAPLAN PUBLISHING