Tag (SQ): Financial efficiency

Clearfield Farms Limited is considering acquiring Village Industries Limited, extracts of the financial statement of the two companies is as follows:

Statement of Financial Position

The two companies retain the same proportion of profits each year and this is expected to continue into the future. Clearfield Farms Limited return on investment is 16%, while that of Village Industries Limited is 21%. One year after the post-acquisition period, Clearfield Farms will retain 60% of its earnings and expects to earn a return of 20% on new investment.
The dividends of both companies have been paid. The required rate of return of ordinary shareholders of Clearfield Farms Limited is 12% and Village Industries Limited 18%. After the acquisition, the required rate of return will become 16%.

Required:
(a) If the acquisition is to proceed immediately, calculate the:
(i) Pre-acquisition market values of both companies.

(ii) Maximum price Clearfield Farms Limited will pay for Village Industries Limited

(b) As a Finance Manager in your company, you have been asked to produce an explanatory memo to Senior Management on the subject Mergers and Acquisition. Your memo should clearly outline what actions a target company might take to prevent a hostile takeover bid.

Drake Limited is a Ghanaian registered multi-national company with FIVE subsidiaries in Europe, Asia and Africa. These subsidiaries have traditionally been allowed a large amount of autonomy, but Drake Limited is proposing to centralize most of the group’s treasury management operations.

Required:
(c) Acting as Group Head of Finance to Drake Limited, prepare a memo suitable for distribution to Senior Management of each of the subsidiaries explaining the potential benefits of treasury centralization.