Page 281 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Pricing issues and post-transaction issues

Financing a cash offer

The amount of finance needed might be higher than expected if there is
a plan to repay the target entity debt at the time of the takeover. This
can sometimes be a requirement of the target entity's lenders, as
stipulated in a debt covenant.

Three main choices for raising the cash needed:

Existing cash Borrowings – from the Rights issue to
reserves – can only be bank, or by issuing existing shareholders

used if the bidder has a bonds Advantage – gearing is
large cash surplus.
Advantage – low cost of not affected, although
servicing the debt. its earnings per share
will fall as new shares
Disadvantage – are issued.
increase in the bidding

company's gearing. Disadvantage – it is the
shareholders
themselves who have
to find the money to
invest.

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