Page 223 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Financial and strategic implications of mergers and acquisitions

Example 3

The directors of GG Co have decided to sell off one of the company's
subsidiaries, HH Co, for $100 million.

The managers of HH Co are keen to set up a management buyout in order to
take control of their company.

They have proposed the following financing package, after lengthy
discussions with bankers and venture capitalists (VC):

$m

Equity invested by managers ($1 'A' shares with 1 vote each) 10

Equity invested by VC ($1 'B' shares with 1 vote for every 10 shares) 30

5 year borrowing from VC – unsecured, 10% interest rate 30

5 year borrowing from bank – secured, 6% interest rate 30

TOTAL 100

Which THREE of the following statements about the financing package
are false?

A The managers own enough of the equity to enable them to vote and
carry decisions in a general meeting

B The venture capitalists own enough of the equity to prevent the
managers from voting and carrying decisions in a general meeting

C If HH Co were to go into liquidation, the bank borrowing would take
priority over all the other sources of finance

D The bank borrowing interest rate is lower than that on the borrowing from
the venture capitalists because the bank borrowing is a mezzanine loan

E If HH Co were to go into liquidation, the borrowing from the venture
capitalists would take priority over all the other sources of finance

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