The assignment has been designed to cover the following learning outcomes associated with successful completion of the module:

Knowledge K1. Critical understanding of the key strategic decisions that a business may have to make and appreciated how accounting and finance can assist in making and evaluating those decisions.

K2. Critical understanding of specific analytical skills in key decision areas within strategy and finance at local and international level.

K3. Critical understanding of the limitations of the current state of financial theoryin making strategic business decisions.

Skills

S1. Competence in applying the key valuation concepts and methodologies of financial decision making in order to contribute to the wider decision making of the organisation

Part A

(a) Company A has 8 million shares in issue and Company B 16 million. On day 1 the market value per share is 5 for A and 7.50 for B. On day 2, the management of B decides, at a private meeting, to make cash takeover bid for A at a price of 7.50 per share. The takeover will produce large operating savings with a value of 25 million. On day 5, B publicly announces an unconditional offer to purchase all shares of A at a price of 7.50 per share with settlement on day 20. Details of the large savings are not announced and are not public knowledge. On day 15, B announces details of the savings, which will be derived from the takeover.

Required:

Ignoring tax and the time-value of money between days 1 and 20, and assuming the details given are the only factors having an impact on the share prices of A and B, determine the day 2, day 5, and day 15 share prices of A and B if the market is:

1. Semi-strong form efficient, and 2. Strong form efficient

In each of the following circumstances:

(i) the purchase consideration is cash as specified above, and(7 marks) (ii) the purchase consideration, decided upon on day 2, and publicly announced onday 5, is one newly issued share of B for each share of A.(8 marks)