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Answers to supplementary objective test questions

46 B, C, D

The discounted cash flow method is the most theoretically sound valuation
method, in that it is consistent with the primary corporate objective of
maximising shareholder wealth. It provides a useful measure of the maximum
value the buyer should pay, not the minimum value acceptable to the seller.

Just like in the dividend valuation model, future growth rate estimates are a key
component in the calculation.

The value calculated by the discounted cash flow method is usually much
higher than the standard net assets valuation because it incorporates the future
earnings potential of the company (i.e. a measure of intangible factors).

47 A, D, E

Poison pill and super majority are pre-bid, not post-bid, defences.

48 5.20

Value after the acquisition = (20m × $5) + (10m × $2) + $10m = $130 million

Number of shares after acquisition = 20m + (1/2 × 10m) = 25 million

Expected share price = $130m/25m = $5.20

49 A

If XX’s management are confident that they can improve the performance of
YY to bring it up to the level of XX, that means that there will be an opportunity
for bootstrapping.

XX’s P/E ratio is $4.60/($4.18m/10m) = 11

Therefore, post-acquisition value will be found by applying this P/E ratio to the
combined earnings.

i.e. 11 × [1.10 × (4.18m + 3.60m)] = $94.14 million.

415