Select the category of risk for each of the descriptions below:

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Company T has 1,000 million shares in issue with a current share price of $10 each.
Company V has 300 million shares in issue with a current share price of $5 each.
Company T is considering acquiring Company V.
Total synergy gains of $100 million have been estimated.
The purchase of Company V's shares would be by cash at a 10% premium above the current share price.
In seeking approval for the acquisition, the likely reaction from T's shareholders will be:

• A.accepted as there is $100 million of synergy which will all go to T's shareholders.
• B.accepted as there will be an increase in the value of the business of $1,500 million.
• C.rejected as T's shareholders will see a decrease in their wealth overall of $50 million.
• D.rejected as T's shareholders will not be willing to pay more than $1,500 million for V.

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Company A plans to acquire Company B, an unlisted company which has been in business for 3 years.
It has incurred losses in its first 3 years but is expected to become highly profitable in the near future.
No listed companies in the country operate the same business field as Company B, a unique new high-risk business process.
The future success of the process and hence the future growth rate in earnings and dividends is difficult to determine.
Company A is assessing the validity of using the dividend growth method to value Company B.
Which THREE of the following are weaknesses of using the dividend growth model to value an unlisted company such as Company B?

• A.The company has been unprofitable to date and hence, there is no established dividend payment pattern.
• B.The dividend growth model does not take the time value of money into consideration.
• C.The cost of capital will be difficult to estimate.
• D.The future projected dividend stream is used as the basis for the valuation.
• E.The future growth rate in earnings and dividends will be difficult to accurately determine.

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Which TWO of the following situations offer arbitrage opportunities?
A)

B)

C)

D)

• A.Option C
• B.Option B
• C.Option A
• D.Option D

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It is now 1 January 20X0.
Company V, a private equity company, is considering the acquisition of 40% of the equity of Company A for a total amount of $15 million.
Company A has been established to develop a new type of engine which will be launched at the end of 20X1.
Company A is forecasting that the new engine will result in free cash flows to equity of $2m in its first year of operation and that this will rise by 8% per year for the foreseeable future.
The new engine is the only commercial activity that Company A is involved in.
Company V intends to sell its stake in Company A when the new engine is launched.
Company A has a cost of equity of 12%.
Assuming that Company V receives an amount that reflects the present value of their shares in company A.
what is the estimated annual rate of return to Company V from this investment? (To the nearest %)

• A.10%
• B.3%
• C.16%
• D.33%

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