SOLVED

31) Aggressive Capital Inc. is known as an asset stripper. How should Aggressive value potential target companies? A) Determine its liquidation value. B) Calculate present value of EVA. C) Use the free cash flow method. D) Analyse the terminal value for the business. E) Evaluate the price earnings value. 32) Body Guards Ltd.’s (BG) balance sheets showed total assets of $100 million and total liabilites of $42 million. Fair values of assets and liabilities were equal to their book values except for a ten year old building whose appraised value was $5 million higher than book. BG has 10 million shares outstanding. BG earned $2.00 per share and paid a dividend of $0.50. Dividends grow at 6% per year. BG enjoys a P/E multiple of 5. BG’s cost of capital is 12%. What is the value of a share using the balance sheet method, the liquidation method, the P/E ratio method, and the dividend growth method respectively? A) $4.80, $5.30, $9.00, and $10.83. B) $6.80, $6.70, $11.00, and $8.42. C) $5.80, $7.50, $4.23, and $7.52. D) $7.47, $3.66, $12.30, and $6.77. E) $5.80, $6.30, $10.00, and $8.83. 33) The accounting authorities are considering changing the rules for accounting for pensions. Previously actuarial gains and losses in obligations and experience gains and losses in pension fund assets were amortized over many years. Current thinking is to require these gains and losses to be reported in the year incurred. How might this rule change affect a company’s share price? A) Share prices would increase due to improved earnings as gains are reported. B) Share prices would become riskier due to increased earnings volatility. C) Share prices would not be much affected by accounting changes. D) Share prices would become more predictable without the amortization expenses. E) Share prices would become more randomized as pension expenses are included the financials. 34) Open Ltd. is listed on the TSX, has a price-earnings ratio 20, earned $6 million in the year just ended, and has 4 million common shares outstanding. Closed Inc. is similar in many respects, but is not listed on any stock exchange and its shares are considered less marketable. What value might analysts put on Closed Ltd.’s shares? A) $9.33 B) $13.33 C) $21.00 D) $30.00 E) $40.10 35) PeopleLife’s share price was below book value for about a year after the recent financial crisis. What circumstances would make this a good time for an investor to buy stock in PeopleLife? A) If investors thought the permanent problems of the company would disappear during the recovery. B) If investors thought the company’s problems were temporary due to the economic downturn. C) If investors thought the company’s earnings per share could withstand sustained pressure from lowered expense ratios. D) If investors thought the company’s dividend policy would be amended to show growth. E) If investors thought the company’s retained earning could continue to grow during the recession. 36) Sask Potash Inc., a fertilizer producing company, was recently the recipient of a takeover offer from Australia’s BHH Mining Ltd. Sask Potash fought back saying the bid significantly undervalued their shares and they urged shareholders not to tender their shares and the government to block the bid. What type of market efficiency does Sask’s board of directors believe in and why might the government not allow the takeover to go forward? A) Weak form of efficiency and government favoritism to fertilizer companies. B) Semi-strong form of efficiency and rising potash prices. C) Strong form of efficiency and a growing world population that needs fertilizer for food growth. D) An inefficient market and no benefit to Canada. E) A market that cannot be fooled and strong demand growth for fertilizer from farmers. 37) Sagrium Ltd. tried for two years to acquire all the shares of Hunter Inc., upping the share price offer by 10% three different times. Hunter shareholders were not convinced and ere justified in not accepting Sagrium’s offer when the price of Hunter’s shares rose above the former’s highest bid offer. As Sagrium prepared a fourth offer, Hunter finally lashed out and made a counter-offer to buy Sagrium. What is this takeover defence known as? A) Converting to private status. B) Poison pill. C) Golden parachute. D) White knight. E) Pac-man. 38) Accounting rules now require that M&A investment banking and legal fees be expensed in the year they are incurred. These fees amount to 1% of the size of the deal, and at year end an all cash deal closed for $50 billion for Arch Ltd. to acquire Coal Inc. Arch has one billion shares outstanding and earned $2 billion excluding the merger costs mentioned above. How would this affect Arch’s earnings per share? A) Arch’s EPS would be $(3.00 per share. B) Arch’s EPS would be $1.50 per share. C) Arch’s EPS would be $1.95 per share. D) Arch’s EPS would be $2.00 per share. E) Arch’s EPS would be $5.00 per share. 39) Why are the values of past dividends not included in the dividend valuation method for the price of a share? A) Because the dividends have already been spent by the shareholders. B) Because the dividends may be recalled if they are cut in the future. C) Because these dividends are already baked into the current price of the shares. D) Because the dividends have often been paid in non-cash forms like stocks dividends. E) Because the dividends are under control of the current Board of Directors, not previous Boards. 40) Free cash flows for next year are expected to be $500 million at Banana Inc. They are expected to grow at 4% per year. Banana’s cost of capital is 11%. What is terminal value of Banana? A) $0.5 billion. B) $0.6 billion. C) $4.5 billion. D) $7.1 billion.