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Advanced Corporate Financial Management – M26322

Section A 34% of total examination marks

Question 1 is a COMPULSORY question and must be attempted.

Question 1

Despite the challenges in 2021, Dreamland plc has emerged as one of the top global online platforms in the areas of gifts, fashion and cosmetic, grocery and smart home appliances, after a few successful acquisitions in their key markets such as Asia, Europe and US. Having said that, the relatively aggressive expansion strategy via takeovers and investments on in-house logistic system and the warehouse/distribution centres has led to a significant amount of debt. The company is facing even more challenges in the year of 2022, given the high inflationary environment and the slowing customer demands around the world.

The managing director of Dreamland plc has requested your assistance in understanding the implications for the business given ongoing global economic and political uncertainty as well as tightening monetary policy in major developed markets.

Required:

a) Identify a regional / global event that has caused an international impact since the start of year 2022. (8 marks)

b) Critically evaluate how the event is relevant in the context of your chosen topic from: valuation, mergers & acquisitions, or risk management. (13 marks)

c) Depending on your choice in (b) above, provide concise advice to the managing director of Dreamland plc as to what measures might be required to reduce any potential impact of associated changes/uncertainties. (13 marks) 

 [34 marks]

Section B 66% of total examination marks

Answer any TWO of the following questions identifying clearly each part of each question attempted. All questions are weighted equally.

Question 2

Assume that you are the finance manager of a UK company ABC plc which is currently trading with China. There has recently been considerable economic, political, and global uncertainty with some countries showing signs of moving towards economic instability whilst others are still showing steady growth. Currency rates could become more volatile for many major trading countries including the exchange rate between the UK pound and Chinese yuan. The company has delivered 50,000 electronic devices to a China company and priced the device in Chinese currency at yuan 12 each. ABC plc expects to receive 600,000 Yuan in three months’ time. The following information is also available in the currency market:

Spot rate: yuan 8.48/£

Three-month forward rate yuan 8.3522/£

The Chinese yuan interest rate is 8 percent per annum. ABC could deposit in sterling at 6 percent per annum.

A three-month Chinese yuan put currency option with a strike price of yuan 8.50/£ is available for a premium of yuan 10000 for yuan 600000.

Required:

a) Explain and illustrate how the money market can be used to hedge (11 marks)

a) Assuming the spot rate at the end of three months is likely to move in two directions: 1) the Chinese yuan weakens to yuan9.50/£; 2) the Chinese yuan strengthens to yuan7.50/£.

i. Explain and illustrate how the forward market can be used to hedge in the two scenarios (9 marks)

ii. Explain and illustrate how the option market can be used to hedge in the two scenarios (13 marks)

Show all calculations

[Total 33 marks]

Question 3

Richmond plc would like to take over Burnaby plc to further establish their leading position in the market they both operate in.  You have been appointed as the advisor to conduct a valuation on Burnaby plc. The table below provides a brief set of financial information for Burnaby plc as of 31/12/2022:

Additional information:

- Based on a more recent independent valuation, the non-current assets of Burnaby are worth about £450m.

- You believe that Burnaby have overstated the value of inventory by £5m and 20% of the trade receivables (or debtors) are likely to be uncollectable.

- A reduction of 20% on outstanding long-term leases are successfully secured by the management team of Burnaby.

- Burnaby has declared a dividend payment of 5p per share for the year of 2022, which will be paid to eligible shareholders in the coming weeks. The company has paid dividends of 4.5p per share in 2021 and 4p per share in 2020. The board expects to maintain a similar dividend growth rate in the near future.

- The share of Burnaby is currently trading at £7.50 and the total number of ordinary shares in issue is 100m.

- Require rate of return for Burnaby shareholders is 12%

- Average industry price-earning ratio is 15.

- Earnings per share for 2022 is 40p

Required:

a) Calculate the current market value of Burnaby. (3 marks)

b) Calculate the total equity value of Burnaby using: i. Asset-based valuation method; ii. Dividend growth model and iii. Relative valuation using PE ratio. Comment on the appropriateness of total equity values calculated when compared to the current market value of the company in a. (18 marks)

c) Briefly discuss the limitations on the use of the three valuation methods in part b. (6 marks)

d) Briefly describe one circumstance where each of the methods in part b is the most suitable valuation technique. (6 marks)

 [33 marks]

Question 4

a. Examine what is meant by a “synergy” in the context of corporate merger and acquisition. (5 marks)

b. Evaluate how synergies help to deliver increased shareholder value and the issues that might have an impact on achieving the full potential of expected synergies.                   (18 marks)

c. Identify a couple of defence strategies for a target firm that faces a hostile takeover bid.  (10 marks)                                                 

[33 marks] 

[Total 100 marks]