ECON 4400 Study Guide - Final Guide: Net Present Value, Amedeo Modigliani, Capital Market

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Question 1
Alpha Ltd and Beta Ltd are manufacturing companies in the same industry. You are
provided with the following summarised information in relation to both companies:
Income statements for year ended 31 March 2010
Alpha
Ltd
Beta
Ltd
€'000 €'000
Revenue 3000 4000
Cost of sales 2000 3200
Gross profit 1000 800
Operating expenses 300 400
Operating profit 700 400
Interest on debentures 200 100
Profit before tax 500 300
Tax 100 60
Profit after tax 400 240
Dividends 140 200
Retained profits 260 40
Balance sheets as at 31 March 2010
Alpha
Ltd
Beta
Ltd
€'000 €'000 €'000 €'000
Non-current assets 10620 5960
Current Assets
Inventory 300 660
Trade receivables 320 740
Bank 480 1100 0 1400
11720 7360
Equity and Liabilities
Issued equity shares 6000 4000
Retained earnings 3200 1100
9200 5100
Non-current liabilities
10% Debentures 2000 1000
Current liabilities
Dividends 140 200
Bank overdraft 100 440
Trade payables 280 520 620 1260
11720 7360
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Detail on Non Current Assets
Non Current Assets
Alpha
Ltd
Beta
Ltd
Machinery at cost 8000 9660
Less Depreciation 2000 7000
6000 2660
Buildings at cost 6000 4400
Less Depreciation 2280 1200
3720 3200
Motors vehicles at cost 1600 1200
Less Depreciation 700 1100
900 100
REQUIREMENT:
(a) Calculate the following ratios for both companies
(i) Gross profit margin
(ii) Operating profit margin
(iii) Current ratio
(iv) Acid test ratio
(v) Inventory days
(vi) Receivable days
(vii) Payable days
(viii) Return on capital employed
(ix) Gearing ratio
(x) Interest cover
(10 marks)
(b) Comment on the performance of both companies in terms of profitability and
liquidity, using the ratios that you calculated and any other relevant information in the
question.
(10 marks)
Question 2
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Empirical evidence suggests that acquisitions have a neutral effect on the economy as a
whole, while benefiting the target company shareholders and acquiring company
managers.
1. Describe briefly some of the important contributing factors which explain why
shareholders of acquiring companies rarely benefit from takeovers
(6 marks)
2. Explain the major justifications likely to be put forward to explain the following
types of acquisitions:
a) Horizontal acquisitions
b) Vertical backward and forwards acquisitions
c) Conglomerate acquisitions
( 9 marks)
3. Target companies have a number of ways to defend themselves against unwanted
takeover bids. A better strategy, though, is to use pre-bid defences to dissuade
potential acquirers from making a bit in the first place.
Discuss.
(5 marks)
Question 3
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