(A) Market Value of Clearfield Farms Limited:
Using the Gordon’s growth model: g = rb
Where r = return on investment
b = retention ratio
g = rb, r = 0.16, b = 0.25
g = 0.16 × 0.25 = 4%

Future Dividend in 1 year
= D1(1 + g)
= 600(1.04) = GH¢624 million

Market Value (MV) = d / (r – g) = GH¢624m / (0.12 – 0.04) = GH¢7.8 billion

Market Value of Village Industries Limited:
r = 0.21, b = 2/3
g = 0.21 × 2/3 = 14%

Future Dividend in 1 year
100(1.14) = GH¢114 million

Market Value (MV) = d / (r – g) = GH¢114m / (0.18 – 0.14) = GH¢2,850 billion

(ii) Maximum Price of acquisition
Clearfield Farms Limited earning in 1 year
GH¢800 million × 1.04
GH¢m
832

Village Industries Limited
GH¢300 million × 1.14
342
1,174

Dividend in 1 year GH¢1,174 million @ 40% = GH¢469.60m

If
r = 0.2 and b = 0.6
g = 0.2 × 0.6 = 0.12

Post-Acquisition Market Value:
MV = GH¢469.6m / (0.16 – 0.12) = GH¢11,740 billion

Maximum Price = GH¢11,740 billion – GH¢2,850 billion
Payable for Village Industries Limited = GH¢8,890 billion

(B). Takeover Defences
White Knight
A situation in which the target company looks for a friendly company where offer is more appealing for the takeover bid.

Shark Repellent
This involves amending the company’s memorandum and articles of association in such a way that makes the takeover difficult for the acquiring company. An example is increasing the margin of majority votes required at an Annual General meeting called to approve such a takeover.

Pac-man Defence
An anti-takeover strategy in which the target company tries to buy up the share of the acquiring company.

Golden Parachutes
This refers to provision in the executives’ employment contract that call for payment of severance pay or other compensation should they lose their job as a result of a successful takeover.

Poison-Pill
A strategy sometimes employed by target companies in a takeover bid to reduce the attractiveness of their securities/assets to the prospective acquiring firm. This is often done by enlarging the outstanding shares of a target company through a new issue of shares to its shareholders at a discount to the market price, thus making the takeover quite expensive to the prospective acquiring firm

(C). To: All Directors of Foreign Subsidiaries
From: Group Finance Director
Subject: Benefits of Treasury Centralisation

It is proposed that the group will shortly centralize its treasury functions. Centralization of group treasury management function means that the decisions regarding currency management, short term investment and borrowing and financial risk management will be taken centrally rather than at subsidiary level.

This will permit significant efficiency, improvements and cost savings. The major benefits will be as follows:
(i) To enhance group decision making – Decisions will be taken in line with the tactical and strategic objectives of the group as a whole, rather than by individual subsidiaries which might from time to time have different objectives.
(ii) Foreign exchange risk management – a central treasury can better appreciate the total foreign exchange exposure position of the group. Netting and matching of receivables and payables in different currencies will be possible allowing transactions cost savings as only the net amounts needed, be hedged or transmitted.
(iii) Better knowledge will exist of total debt and cleared bank balances. This will facilitate interest rate hedging. Surplus cash from one subsidiary will be lent to other subsidiaries of relatively favourable rates.
(iv) High Investment Returns – Cash may be aggregated and invested at better rates and borrowing may be possible at favourable rate, including from international markets to which individual subsidiaries would not have direct access.
(v) Transfer prices will be centrally set to try to minimize the group tax bill.
(vi) A centralized treasury functions with effective internal controls, will be able to prevent the possibility of major financial losses.
(vii) A centralized treasury will be able to collect and analyse relevant economic and financial information and supply such information to the benefit of all subsidiaries.