ACCA Advanced Financial Management 3

Question 1

When valuing a target company using the P/E ratio method, the most appropriate P/E ratio to apply to the target's earnings is typically:

Accepted Answer

The acquiring company's P/E ratio or a relevant industry P/E ratio reflecting post-merger prospects

Answer

The target's current market P/E ratio

Answer

The reciprocal of the risk-free interest rate

Answer

A weighted average of both the acquirer's and target's P/E ratios

Question 2

In a merger or acquisition, 'synergy' is best defined as:

Accepted Answer

The additional value created by combining two entities that exceeds the sum of their individual standalone values

Answer

The takeover premium paid above the target's pre-bid share price

Answer

The cost savings from eliminating duplicated head-office functions

Answer

The increase in the acquirer's earnings per share immediately after the deal closes

Question 3

Which of the following is a recognised defensive tactic used by a target company's board to resist a hostile takeover bid?

Accepted Answer

Inviting a preferred acquirer (white knight) to make a competing bid

Answer

Issuing a profit warning to depress the share price before the bid closes

Answer

Selling the most profitable subsidiaries to reduce the company's attractiveness

Answer

Paying out all cash reserves as a special dividend to make the company less valuable

Question 4

In a leveraged buyout (LBO), the acquisition of the target company is primarily funded by:

Accepted Answer

High levels of debt, typically secured against the assets and future cash flows of the target

Answer

A new equity issue by the acquiring vehicle

Answer

The acquiring company's existing cash reserves

Answer

Government or private equity grants provided to management teams

Question 5

The 'bootstrap effect' in mergers refers to:

Accepted Answer

An apparent increase in EPS that results from combining firms with different P/E ratios, without any real value creation

Answer

A genuine improvement in EPS driven by real operating or financial synergies post-merger

Answer

The process of growing a company from inception without external funding

Answer

The use of target company cash flows to service acquisition debt

Question 6

Under IFRS 3 (Business Combinations), goodwill arising on acquisition is measured as:

Accepted Answer

The excess of the acquisition cost over the fair value of the net identifiable assets acquired

Answer

The difference between the target's book value of net assets and the consideration paid

Answer

The estimated present value of future synergy cash flows attributable to the acquisition

Answer

The sum of brand value, customer relationships, and patents recognised by the target pre-acquisition

Question 7

In a management buyout (MBO), which of the following best describes what occurs?

Accepted Answer

The incumbent management team of a business acquires ownership of that business from its current owners

Answer

An external management team from the acquiring company replaces the target's existing management post-deal

Answer

The company issues discounted shares to all employees as part of a broad-based ownership plan

Answer

A division is sold to its management at net book value as recorded in the group accounts