Page 369 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Answers

 Fixed operating and administrative costs savings.

 Consolidation of manufacturing capacity on fewer and larger sites.

 There may be bulk buying discounts.

 Possibility of joint advertising and distribution.

 GSL is badly managed – thus the elimination of inefficiency could allow
for financial synergy.

Example 2

BB is a listed company located in Country B. It is a retail clothing business
which operates a large number of branded retail stores throughout Country B.
Its functional currency is the B$. BB currently has five distinct brands, each
owned and managed by a separate business unit. Each business unit runs its
own chain of retail stores. BB is seeking to sell QQ, one of these business
units, in a management buyout.

A selling price of B$ 450 million has been agreed. It is anticipated that the
effective date of the disposal will be 1 July 20X4.

The managers of QQ have been in discussions with a bank and a venture
capitalist regarding the financing for the MBO. The proposal is that the
managers will put in B$45 million of equity, and the venture capitalist
B$180 million (for class B equity shares with limited voting rights). Then the
venture capitalist and the bank will each invest B$112.5 million as debt finance.

The venture capitalist expects a return on the equity portion of its investment
of at least 25% a year on a compound basis over the first 4 years of the MBO.
No dividends are to be paid during this period.

361