Company BBB has prepared a valuation of a competitor company, Company BBD. Company BBB is intending to acquire a controlling interest in the equity of Company BBD and therefore wants to value only the equity of Company BBD.

The directors of Company BBB have prepared the following valuation of Company BBD:
Value of Equity = 4.63 + 5.14 + 5.56 = S15.33 million
Additional information on Company BBD:

Which THREE of the following are weaknesses of the above valuation?

• A.The valuation is overstated as the directors have failed to deduct tax from the free cash flows.
• B.The approach used calculates the value of the total entity not the value of equity.
• C.Free cash flows to all investors should be discounted at the cost of equity of 10% rather than WACC of 8%.
• D.The valuation is understated as forecast future growth has been ignored beyond year 3.
• E.The valuation is understated as the directors have failed to include a perpetuity factor in the calculations.

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Hospital X provides free healthcare to all members of the community, funded by the central Government.
Hospital Y provides healthcare which has to be paid for by the individual patients. It is a listed company, owned by a large number of shareholders.
In comparing the above two organisations and their objectives, which THREE of the following statements are correct?

• A.X and Y have the same primary financial objective - to maximise shareholder wealth.
• B.Only Y is likely to have a mixture of financial and non-financial objectives.
• C.X and Y will have the same primary non financial objective - provision of quality of health care.
• D.The performance of X will be appraised primarily on the basis of value for money.
• E.X is a not-for-profit organisation while Y is a for-profit organisation.

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A company generates and distributes electricity and gas to households and businesses.
Forecast results for the next financial year are as follows:
The Industry Regulator has announced a new price cap of $1.50 per Kilowatt.
The company expects this to cause consumption to rise by 10% but costs would remained unaltered.
The price cap is expected to cause the company's net profit to fall to:

• A.$47.5 million profit
• B.$20.0 million profit
• C.$27.5 million profit
• D.$35.0 million loss

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The ex div share price of a company's shares is $2.20.
An investor in the company currently holds 1,000 shares.
The company plans to issue a scrip dividend of 1 new share for every 10 shares currently held.
After the scrip dividend, what will be the total wealth of the shareholder?
Give your answer to the nearest whole $.

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Company C invests heavily in Research and Development an need to raise $45 million to finance future projects. It has decided to use equity finance raised by a tender offer, The following tender offers have been received from potential investors:

Company C wishes to select an offer price that will project shareholders from a significant dilution of control but still raise the required amount of finance.
What offer price should Company C's select?

• A.$4.25
• B.$4.75
• C.$4.50
• D.$4.00

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