0 1 2 3 4 5 Inflation 10%

Investemen -200 Saes 100 PA

Scrap 40 Tax 30% Tax will be paid in arriers
Sales 110 121 133 146 Capital allowances
Reducing balance method 25%
Tax 30% -33 -36 -40 -44
15 11 8 14
-200 110 103 108 154 -30
Discount f 1 0.909 0.826 0.751 0.683 0.621
-200 100 85 81 106 -19

Npv 153

Capital allowances
BV CA Tax Yrs
Cost 200 50 15 1
150 38 11 2
113 28 8 3
84 21 14 4
48

Cost-scrap 160
Tax 30% 48
e paid in arriers
 0 2 3 4 5
Investement -80000
Scrap 20000

Tax
Tax saving

Cost 80000
Scrap -20000
Resedual value 60000 12000
Tax allwance
CA DepreciationTax saving
80,000.00 16,000.00 3,200.00
64,000.00 12,800.00 2,560.00
51,200.00 10,240.00 2,048.00
40,960.00 4,192.00
12,000.00
Tax shiled 2000 20% 4% 16
Gain 2000 5% 80% 80
96

GR 0 1 2
Investement

Working
Tax @20%
WC
40,000,000.00 -43600000 -47524000
(3,600,000.00) (3,924,000.00)

16200000
Working (40,000,000.00)
Sales (230,000,000.00)
Unit 12000 22000
Selling price $70
Sales 48,891,262.14 94,855,377.51
Variable cost GR 1350.00 (16,200,000.00) (32,373,000.00)
Additionla variable cost $7 ($4,889,126.21) ($9,770,103.88)
Fixed cost(total) GR 30000000 (30,000,000.00) (32,700,000.00)
Depreciation (20,000,000.00) (20,000,000.00)
(22,197,864.08) 12,273.63
(22,197,864.08)
(22,185,590.45)

Tax @20%
WC (3,600,000.00) (3,924,000.00)
(270,000,000.00) (5,797,864.08) (6,109,590.45)
NPV
Working 2 Loan 13% 30000000 20%
6%
Subsidy 7% -30000000 0.8
Working 3
Machinary GR 80 Depn Strat line Tax tax saved
Depreciation per year 20 4

Exchange rate Cost of equity

Spot rate 55 1.058 58.20

58.20 1.058 61.59
61.59 1.058 65.18
65.18 1.058 68.98
 3 4 5

-51801160 -56463264.4
(4,277,160.00) 51,801,160.00

47000 60000

214,450,176.07 289,713,726.82
(75,384,945.00) (104,897,349.00)
($22,751,019.18) ($31,657,801.16)
(35,643,000.00) (38,850,870.00)
(20,000,000.00) (20,000,000.00)
60,671,211.89 94,307,706.66

(22,185,590.45)
38,485,621.44
(7,697,124.29) (18,861,541.33)
(4,277,160.00) 51,801,160.00
46,511,337.15 52,939,618.67

3000000033%

-2999999913%
120%
Risk frate+B(Mr-RFR) 0.03 1.17 0.06
13% 0.0702
 0 1 2 3 4
Sales 24.87 42.69 61.81 36.92
Dirrect project cost -14.37 -23.75 -33.12 -19.05
Investement -38 10.50 18.94 28.70 17.88
Tax -0.50 -3.39 -5.44 -3.48
Scrap value 4

Tax @20%
10.00 15.55 23.26 18.40
WC (4.97) (3.56) (3.82) 4.98 7.38
Add back depn
-42.97 6.44 11.73 28.24 25.79

-42.97 6.44 11.73 28.24 25.79

NPV 8.61 5.75 9.35 20.10 16.39

CA -8.00 -2.00 -1.50 -0.50

0.50 3.39 5.44 3.48

Tax allowance
Cost Dpen rate Depn tax relife
16 50% 8 1.60 34 50% 17.00
8 25% 2.00 0.40 17 25% 4.25
6 25% 1.50 0.30 12.75 25% 3.19
4.50 25% 0.50 0
4 - (0.50)

Working capital 4.97 8.54 12.36 7.38

4.97 3.56 3.82 (4.98) (7.38)
-4.97
Loan 60% subsidised -3.57
40% -3.82
Discount factor 4.98
Issue cost 2% 38 0.76 -7.38
0.76
0.76
0.76
Loan tax shiles
 Beta of Lintu
Equity 128 1.5
debt 31.96
Beta of Bu 1.25
RFC 2%
Risk premu 8%
Cost of equ 12.0%

0.8769
Normal distribution

need to see from the table

Expected value 40000 Stanadared divation -0.02381 0.091
Standared diviation 210000 9.10%
NPV > or equal to 45000
40.90 40.90%
How much you are going to pay for the option

The option prices are determined

Excersise price
length of the excersise period
Volitility of the option
risk free rate

Value an option
1) Share price compaired to
2)exersise price
3) volitility ( standared diviation of the share price)
4) risk (how to I spent the money elswhere
5) expiry date

The model put this variabls in the furmula

E.g.
1) Share price compaired to 47
2)exersise price 45
3) volitility ( standared diviation of the shar 25%
4) risk (how to I spent the money elswhere 10%
5) expiry date 0.5

C=PaN(d1)-PeN(d2)e^-rt 47 45
Where
d1= in(pa/pe)+(r+.5s^2)t/S*Radical t 0.043485 0.065625 0.10911 0.61722
d2= d1-S*Radical t 0.176777

Share price 85 -0.057158 0.35 0.292842 0.654814

Expiry date 5 0.447214
Ex price 90
Volatility 20%
Resk free 5%
 DVM
Without growth With growth

SP= DIVS/COE DIV+g(next year)/CoE-g

CoE= DVIS/SP SP=
Coe is in decimal

CoE= DIV+g/SP +g

ilustrattion
Div just paid 2 Growthe 5% 0.21 0.05 0.26
Share price 10
What is the CoE

CAPM
Rf=Beta(RM-RF)

Govt give this is risk free Market will give you morthan the govt i.e 105
If I am risk as the market then I will get the market rate as a return

systematic risk(β)

Market increasees by 10% It is not non systematic risk can be diversified away
We go 15% more so the beta is 1.5 cann't take unsystematic risk
If share gose by 10% then we will go down by 15% Diversified away means invest in different co's.

Government bond 3% Beta 1.2

We are 20% more riskier than GOVT
As a shareholder we we will take

Govt bond 4% Treasury bond 3%

ß 1.2 ß 0.9
Market ret 10% Market primum 6%
CoE 11.2%
8.4%
be diversified away

n different co's.
modigliani and miller proposition 2 (with tax)

Ke=k
Equity finance co. MV
cost of debt (before tax) 4.76% 1785
Cost of equity 16.83% 1400
WACC 9.40%
Tax 25%

Ke = cost of equity
Keu= Cost of equity ungeared

16.83% Keu+ 75%*keu*1785/1400 0.045518

=Dv/EV 1.275
75%*keu*1.275
1.95625 keu
21.38% 0.1093
10.93%

Ilustration 10% kei+ .8*kei*.41 0.023296

Cost of capital 8.70% Kei 0.3328 1.3328
Cost of debt before tax 7% Ke= 0.092509 9.25%
Cost of equity 10%
Number of shares 200 MV of shar 2000 0.416
Share price 10 MV of debt 832
Nominal value of debt 800
Mv of debt 104
Tax 20%

Cost of capital 6.20% MV share MV debt Vd/Ve 1.575

Cost of debt before tax 5% 1000 1575
cost of equity 10% 10% kei+.75kei*1.57 0.059063
Number of sahres 100 16% 2.1775
share price 10 0.073048
nominal value of debt 1500 7.30%
Mv of debt 105
Tax 25%
0.92437
 combined cost of capital

P S P buying S

Business risk Business risk ,=Asset Beta

+

FR Reagr

B= CAPM for COE

WACC Cost
F X = X
D X = X
X X

P co Eq beta 1.2
S co. Eq beta 0.9
MV
Ungear P =1.2*(E/E+D(t) 0.8 100 80
Ungear S =.8*(E/E+D(t) 0.6 60 36
160 116
Divide Cost by market 0.725

Combined asset beta 0.725

Capital structure of the new company regearing should be made

=E30*E+d(t)/E = 0.9

Combind equity beta

Use in the CAPM of CoE

Rf

Cost
WACC

EQ 140 10% 14
Debt 60 8% 4.8
200 18.8

9.4%
Cmbined cost of caputal discount for new company

7000 21000
Asset beta MV
A 0.68 21000 14,280.00
C 1.1 0.657895 0.72 36000 25,920.00
57000 40,200.00

0.71 Asset beta of the combimed co

0.71 60 31.2 60.00 1.07

CAPM 11.86%

WACC
EQ 60 11.86% 7.116
Debt 40 0.0468 1.872
100 8.988

9%
Fodder
Equity beta 1.53

Pursuit
Equity beta 1.18 Ungear 1.18 50 86 0.69

F 1.53 1.53 90 97.2 1.42

Combine

Combined asset beta

Combined Equity beta
Regear 0.85 0.85 50 86 1.46

Eq cost Rf+B((RM-RF)
50 13.27% 6.64 13.27
Debt
50 4.61% 2.30
100 8.94

Descoput free cash flow 0.09 9%

Makonis Nuvola
Current share price 5.80 2.40
Number of shares 210.00 200.00
Equity beta 1.20 1.20
Asset beta 0.90 1.20

Makonis Nuvola
equity Vlaue 1218 480

Equity beta 1.2 1.2

Asset beta 0.9 1.2

0.985 ((C41*C38)+(D41*D38))/(480+1218)
Equity beta 1.50 0.98*(60+40*0.8)/60

Cost of Equity
12.52
Cost of capital
9 9%
 MV
140,000,000.00 96,046,511.63

40,095,000.00 56,801,250.00
180,095,000.00 152,847,761.63

0.85
Combined Equity beta
 0 1 2 3 4
revenu 15,729.00 16,515 17,341 18,208
PBIT 2,713 2,849 2,991 3,141
Tax (597) (627) (658) (691)
WC (300) (315) (330) (347)
Free cash flows 1,817 1,908 2,003 2,103
Pv 6,309

WC (299.60) (614.18) (944.49) (1,291.31)

(300) (315) (330) (347)
 Currency SWAP

Agreement
Co. B
Co A £ - Capital $ - Capital
+ Interest + Interest

How 4/100 pounLoan 5/200 dollar

Step 1 1) capital Swap at spot rate £ - To $ 2.00

£ 100.00
A $ 200.00 B

Step 2
Pay interest on Pay interest on
$ - £ -
$ 200.00 Pre arranged rate
A B
Step 3 £ 100.00

Why they are doing so becaouse

4/100 pound loan 5/200 dollar loan

Can get (6% $ 200 loan) (6% pound 200 loan)

Better interest rate on foregn currency loan

Pre- arrenged rate -hedge forgn risk
This an example of variable

Look what will happen in the fixd rate

Wants to interest in SA
Wants to interest in US
US co. SA co

Can borrow USD @ 6% Can borrow Rand @ 8%

Can borrow Rand @9% Can borrow $ @ 11%

Solution
Us borrow $@ 6% S.A Co

US co Borrow rand SA co@8

Fixed rate for variable rate

example Wants Spot
US Co € 500.00 5yers EURO1.12:$

Current Offer Profit

Step 1 Fixed 7% 5% 2%
Variable Libor + 0% Libor + 0% -0.1%
1.9%

Step 2 How much is for me?

60% 1.90 1.14
Step 3 Fee -0.1
Gain 1.04

5.96 5.96%

Fixed 8% 5% 3%
Variabble 1% 0.8% -0.2%
2.8%
Split on gain 60% 2.8 1.68
Fee -0.3
Net gain 1.38 1.38%
Effective interest 8.00 1.38 6.62 6.62%

Current Offer
Fixed 3% 5% 2%
Variable 1% 1.20% 0.2%
Loss 1.8%
Loss split 60% 1.8 1.08
Fee 0.5
Gain 0.58
Effective interest 3 2.42 2.42%
Option is the right to take or not. But need to pay a premium for the right

Co. Going to Receive A$ 10000 In three month time

Now
3 month A$ put option 1.65
Premium A$ 1000
Spot 1.551

3 Month later
Spot 1.6596

First of all they don’t take the option

With taking the option
10000 1.6596 6,025.55 6,025.55 6060.60606061
Have to pay premium -644.7453 -644.745325596
They save this amount 5,380.80 5415.86073501 Receiving this amount

Comparing Forward contract futures contract vs

Forward contract V Futures contracts

Specified dates March ,June, September, December
OCT Exchanges
tailor made specific
date, amount Standardized to 62500
Forward contract
Uk co. we have to pay $ 200 in 3 month time
+.01
Spot $2 -0.1

You want to pay so the bank will sell to you

3mont forward rate would be $1.99 +0.03
-0.03
If we take the three month forward rate then to pay $
Pay $ What will the bank do if want to pay in dollar the bank will sell us therefore $ low
$200/1.96 $ 102.04

What if it is a future
US co.
Receive £ 937,500.00
Today spot rate $1.8:pound 1.8 $ 1,687,500.00
Future $1.7 to Pound 1.7
Receive 2 month later spot rate $1.6 to pound 1.6 £ 1,500,000.00
Future rate now $1.5 to pound 1.5

Perfect hedge - spot rate change goes equally worth f

Future rate low risk need to do a deposit in the bank deposit

If you lose it you paid this amount nothing eals
will sell us therefore $ low

Try to fix it if the interest rate going down

Standard contracts
To fix it 15.00
 187500 We would receive from the bank
£ 1,687,500.00 We get the same amount we get
Since it is a perfect change
spot rate change goes equally worth future rate
 Local currency in million
Owed by Owed to
Armstrong Us Heran SA US 12.17 12.17
Heran SA Massie EURO SA 42.65 3.97
Giffed DKr ArmstrongUS Dkr 21.29 3.88
Massie Euro ArmstrongUS US 19.78 19.78
Armstrong US Massie EURO EURO 1.57 2.13
Heran SA Giffed Dkr Dkr 16.35 2.98
Giffed DKr Massie EURO EURO 1.55 2.11
47.03

Owed by
Giffed ArmstrongHeran Massie Total
Giffed 2.98 2.98
Armstrong 3.88 19.78 23.66
Owed to Heran 12.17 12.17
Massie 2.11 2.13 3.97 8.22 47.03
Owed by (5.99) (14.30) (6.96) (19.78)
Owed to 2.98 23.66 12.17 8.22
Net (3.01) 9.36 5.21 (11.56)

Owed by Owed to Currency Amonut Pound

Kenduri UK Lakama US US 4.5 2.821317
Kenduri UK Jaia CAD CAD 1.1 0.700637
Gochiso JPY Jaia CAD CAD 3.2 2.038217
Gochiso JPY Lakama US US 1.4 0.877743
Jaia CAD Lakama US US 1.5 0.940439
Jaia CAD Kenduri UK CAD 3.4 2.165605
Lakama US Gochiso JPY JPY 320 2.410546
Lakama US Kenduri UK US 2.1 1.316614 13.27112

US/1Pound CAD/1Pou JPY/1Pound

Spot rate 1.5950 1.5700 132.7500
3 Month forward 1.6017 1.5665 130.1000

Owed by
Kenduri Gochiso Jaia Lakama Total
Kenduri 2.165605 1.316614 3.48222
Gochiso 2.410546 2.410546
Owed to Jaia 0.700637 2.038217 2.738854
Lakama 2.821317 0.877743 0.940439 4.639498
Owed by -3.521954 -2.91596 -3.106044 -3.727161
Owed to 3.48222 2.410546 2.738854 4.639498
Net -0.039734 -0.505413 -0.36719 0.912338
Short term interest
Payable loan
Future Price Interest rate
94 6% You stod here the interest rate is variable
93 7% You are worried for intrest to be increased
92 8%
What you will do take
Sell @ 94
Buy @92

If you want to hedge aginest in increase in iterest then what you will do sell futuers no the higher
And do y

Hedge against Interest rate then Sell futures

Hedge against
Interest rate Then buy future

6% 94 Buy

4% 96 Sell

Short term interest rate

30/10 4 month 28/2 6 month

Borrow
$ 5,000,000 Sell future Now higher price

Futures Dates Futures contaract

March Sell march futures How much should I sell 3 month
June 1,000,000.00
September
December
No of contracts $ 10 we will sell 10 march future contracts

31/7 3 month 30/10 2 month

Now Borrow sell future
 10,500,000.00

Futures Dates
February
May
August
November Sell No fo contracts 14

31/1 4 month 30/5 3 month 31/8

Now Borrowing 8,000,000.00
Spot rate 4.25
3.50% 4.25%

Futures
31/1 Futures date30/5 3 month
97 March 1,000,000.00
96.5 June 95.75 We wanty to sell june future Tick value
96 September 95.25
95.5 December 95
We wanty to sell june future No of contracts 8

Actual position Future price Sell future @ 96.5

Cost 85,000.00 Buy back 95.75
Gain 15,000.00 Profit 0.75 75
Effectively 70,000.00

Effective interest rate 0.035 3.50% It is perfect hedge

30/4 4 months Borrow 30/8 3mont

Spot rate 4,750,000.00
5.45% 5.14
94.55 5.14% Futures
3 month
30/4 Future dates 9-Jan 500,000.00
March Tick value
June
94.55 September 94.86 September futures
December Sell 94.55
Buy 94.86
Future loss -0.31 31

No of contract to be sell in 30 september

 9.50 Like 10 contracts

Loss 3875

Actual interest 61,037.50

64,912.50 0.055

30/6 30/10 3 mont

Now Borrow 20,000,000.00
Spot 4.30% 95.7 4.1
95.7 4.10% Futures contract
3 month
contract size
30/10 Tick value
30/6 Futures Date
March
June
September
96.3 December 96.06 Future sell 96.3 96.06

Contract 20
Actual interest 205,000.00
Futures gain -12000
193,000.00
Effective interest 0.0386 3.86%

Base -0.6 60 Basis 60

10 40
20
the interest rate is variable
d for intrest to be increased

utuers no the higher

n Sell futures

n buy future

w higher price

ures contaract

contract size

march future contracts

31/12
Futures contract
3 months
500,000.00 Contract price

25

30/11

12.5
 31/1

ures contract

1000000
25

0.24
24

Basis risk
 What is basis?
June futures price
28/2
Spot rate 93.9
1.4 Basis 0
95.3

Interest rate futures & basis

30/11 30/4 4 month 31/8
Now Borrow
Spot rate; 5.50% 60,000,000.00
(libor Spot libor 5.75%
94.5 94.25
30/11 Future dates Futures contract
March 3 month
94.85 June 94.85 500,000.00
September 94.35 Tick size 0.01%
December 0.5 50 Tick value 12.50

Co can borrow T libor +.75%

Basis -0.35 -0.05 -0.25

-0.1

Actual interest 1,300,000.00

Futures (100,000.00)
1,200,000.00
Contract number to sell in june 160
Gain or loss 100,000.00

Effective interest 0.06 6%

Using Basis to predict foutures price

31/12 30/4 June futuers
Spot rate 94.1 94.8
-1.2 -0.2
95.3 95.2 This the prediction
-0.8
-0.4
 Sell june futures

Alecto co Exam type questions

1-Jan 4 month 1-May 5 month 30-Sep
Now 22000000 0.038 Futuers
3.30% Borrow 4.6% 3 month
Libor + 80 basis Contract si
96.7 96.2 96.16 Tick value
0.54 0.09 0.18
96.16 June future 96.02 96.02 0.14 14

Number of contracts to be sell on June would be

36.67 37

12950
Actual interest would be with 5% increse in LIBOR
421,666.67
(12,950.00)
408,716.67

Effective interest 0.045 4.5%

Alecto co Exam type questions

1-Jan 4 month 1-May 5 month 1-Sep
Now 22,000,000.00 2.8% Futuers
3.3% Borrow 0.036 3.60% 3 month
Libor + 80 basis Contract si
96.7 97.2 96.16 Tick value
0.54 0.09 0.18
96.16 June future 97.02 97.02 -0.86 -86

Number of contracts to be sell on June would be

36.6666666667 37

-79550
Actual interest would be with 5% increse in LIBOR
330000
79550
409550

Effective interest 0.0446781818182 0.045 4.46%

1,000,000.00
25

1000000
25
 Option explained using example

Now 4 month Borrow 3month

3.75 10,000,000.00
6%

Strick rate Option

4% + Premium 0.50% PA

Pay 150,000.00
Premium 12,500.00
Receive -50000
112,500.00
Effective interest rate 0.045 4.50%

The 4.%came from the 4% and the prmium of .5%

Option

Decide whether to take option or not If it is in your favour take if not not

Strick price 96 4%
Futures 95 5%
Excersise ? Yes Borrowing Buy put option
Excesise? NO Recipts Buy call option

The most significant transaction which Massie Co is due to undertaking with a company outside the Armistron Grou

in the next Six months is that is due to receive 25,000,000 from Bardsly co on 30,November.

Massie Co's treasury manager intended to invest the money for the Six months until31 May , when it will be used to
funmd some major capital EXPENDITURE. However the treasuyry manager is concerned about change in interest ra
Prediction in the media range from a 0.5% rise in interesr rates to a.5% fail.

Because of the uncertainity the treasury manager has decided to protect Massie co. by using derivatives. The treasu
mabnager wishes to take advantage of Favourable interest rate movements . Therfore she is considering optio on
interest rate futures or interest rate collars as possible metheod of hedging, but not interest rate futures. Massie co
can invest at LIBOR minus 40 basis point and LIBOR is cyrrently 3.6%
 The treasury manager has obtained the following information on EURO futuers and options , She is ignoring margin
qequirements.
`

Oprtion on the tree mont Euro futuers 1,000,000.00 contracts, tick size .01% and tick value euro 25. options are in
annoual %.

Septembe Call
r december March Strike September Puts December March
0.113 0.182 0.245 96.5 0.002 0.123 0.198
0.017 0.032 0.141 97 0.139 0.347 0.481

It can be assumed that settelement for the ciontract is at the end of the month. It can also be ssumed that basis
diminishs to zero at contract maturity at a constant rate and that time intervals can be countyed in month

Required
Based on the choice of option on futures or collars which Massie co. is considering and assuming the company does
face any basis risk, recommend a hedging strategy for the 25 million receipt. Support your recommendation with
appropriate comments and relevant calculations.

1-Sep 30/11 6 month

LIBOR 3.60% 0.4% 95.9 Receive Buy Future
3.2% 25,000,000.00 Call option
Future pric 96.4 3.70
0.64 0.16 3.7%

95.76 December 95.74 95.9

Strike 96 4 97 2.5
Future 95.74 4.26 95.74 4.26
would I Excersie the option No No
Becaouse the futureprice lower

Iterest recived 462,500.00 462,500.00

Pay primium (4,000.00)
Pay primium (22,750.00)
458,500.00 439,750.00
 Sell low
Buy high

outside the Armistron Group

mber.

May , when it will be used to

about change in interest rates.

using derivatives. The treasury

she is considering optio on
erest rate futures. Massie co.
tions , She is ignoring margin

lue euro 25. options are in

lso be ssumed that basis

countyed in month

assuming the company does not

our recommendation with

31/5
 Using collars as short term interest

It is setting a minumam interest rate and a maxumam interest rate

Payable
if we go to normal option the primium is high so we have to minimize the periumm

Borrowing
Max interest rate Minumam interest rate
Buy Sell
Put Call

Whether excersise or not Co. decide to excersise or not The option hlder will decides
Yes
If they decide we will make a loss

Buy put sell call

Srike price 95.5 96 Note always take buy lower price and sell high
Future pric 95.44 95.44
Exercise Yes If they are exercise it will be a loss for us and the loss is 0
Gain
December callsStrick priceDecember put
0.541 95.50 0.304 0.081
0.223 96.00 0.508

When comparing the future price if it is less than the strike price excersise from our side
For the other if he is to buy it has to be lower price

Ticks 6 25 68 10200
Premuim on 8.1 25 68 13770
-3570

Collars for recipts

Buy call Premiums Sell put
High stric Buying-selling Lower strick
Net
0.032 0.123 -9.1
Gain los if he take
Strick 97 3% 96.5 3.50%
Future 95.74 4.26% 95.74 4.26%
Exercise No Yes
No gain Loss will be there
 (95,000.00) 50 25 76
Premuim -0.091 11,375.00 50 25 9.1
Interest received 462,500.00
378,875.00
Effective interest

Option and collars revision

```````````````````
Borrowing

Option Collars

Buy put Buy put Sell call

Lowest rate Highest rate

Pay all the premiums gain loss

Premuim Net off the Buy & sell

Recipt

Option Collars

Buy call Buy call Sell put

Hghiest rate lowest rate

Pay all the premiums gain loss

Premuim Net off the Buy & sell
ze the periumm

y lower price and sell higher price

oss for us and the loss is 0

Unbundling
It is the process of selling off non core business

why do companies decide to inbundel their business?

1) to realese funds
2) to reduce gearing
3) to allow management to concentrate on their chosen core business

the main form of unbundling:

1) Divesteemnt
2) Demergers
3) Sell-offs
4) spin-offs
5) Management buy-outs

Divestement is the process of selling an asset (business)

This can be achived either by
selling the whole business to a thired party or
selling the asset piecmeal

Reason for divestement

The principal motive for divestement will be if they either do not conform to group or business unit nstrategy

a company may decide to abandon a particular product/ or activity because oit fail to yield an adquit return

allowing managemnet to concentrate on core business

To raise more cash possibly to fund new acquisitions or to pay debts in order to reduce gearing and financial risk

Spin-off/demerger
This is a new company is created and
the shares in the new company are owen by the shareholders of the original company

there is no change in owmership

Of asset but the asset are transferred to the new company.
the result is to create tow or more companies whereas previously there were only one company

Easch company now owns some of the assets

of the original company and
the shareholders own the same proportion of shares in the new company as in the original company

demerger
involves spliting a company into two or more separaty parts
with each part becoming a separate , independent company
the shareholders would then hold shares in each separate , independent company
Dis advantage of de-merger
Economies of scale may be lost

the ability to raise extra finance ,especially debt finance , to support new inv3estement and expansion may be redu
unit nstrategy

dquit return

and financial risk

ne company

iginal company
nt and expansion may be reduced
 unbundling

Ether the part of the company or asset to external 3rd company

cash or no cash and to fund value giving activites
management buying
selling a division but not asset to another external managemnt team
will runn the business will have equity
they will runn betterthan present mangement

Management buy out

Is the purchase of a business from ioits owners by its managers
Eg
The directors of a company in a subsidary company in a group might buy the company from the holding company

reason for MBOS

a parent company wishes to divest itselef of a business that no longer fits in with its corporate objectives
a company /group may need to improve its liquidity
in such circumstance a buy-out maight be particularly attaractive as it would normally be for cash

a) distingush between a managemnt buy-out (MOB) and a management buy in (MBI). Discuss the relative
benefit and drawbacks to Co. If it is disposeed through a MOB instead of MOI

MBO MBI
Buy out by current mangement Buyer by external management
advantage knowledg of the busines n ew fressh idea that has not been done before
good insight into cost save revenue Different expriance
less employess diruption and resistagetting new finance
no part baggage

Estimate , showing all relevant calculkation whether the ristrictive covenant imposed by Dofu co. is likely to be meet.

Gearing 1 2 3 4
Book value of debt 43,342 36,152 28,387 20,000
Book value of equity 15,965 23,144 31,659 41,649
Covenant 75% 60% 50% 40%
Actual 73% 61% 47% 32%
Non curent 40800 53040
Current ass 12300 12300
Loan 30000
Trade and 7900 7900

Equity 10000
Convertible bond 20000

Sales value 54,900

Operating p 12,200 13,542 15,032 16,685 18,520 0.926 0.857
Finance co 1,600 3,600 3,067 2,492 1,871 9057.624
Profit befo 10,600 9,942 11,964 14,193 16,650
Taxation 2,120 1,988 2,393 2,839 3,330
Operatin pr 8,480 7,954 9,571 11,354 13,320
Dividend (1,988) (2,393) (2,839) (3,330)
Retained earnings 5,965 7,179 8,516 9,990
15,965 23,144 31,659 41,649

Loan repayment 30,000.00 23,342.38 16,152.14 8,386.69

Interest 2,400.00 1,867.39 1,292.17 670.94
(9,057.62) (9,057.62) (9,057.62) (9,057.62)
23,342.38 16,152.14 8,386.69 -
Convertible 20000 1200 1200 1200 1200

profit after tax 166 83 83

Sale of asseSell of the business

30% 70% attribut Valuation Going to sell as business
Non current asset 550 165 385 442.75
Current asset 122 36.6 85.4 68.32
Non-current liability 387 116.1 270.9
Curreny liability 95 28.5 66.5
201.6 511.07 581
482 482
29.07 99
Additional c 300.6

demer3
e holding company

o. is likely to be meet.
 0.794 0.735 3.312

ell as business
 purchase consideration
How A should pay to B
Cash or shar or mixture of both

Cash Share
Quick if you have it
deinite price What would be the price be a's sahres declining from the acqusition\
No continuousing involvement of B(this may be
B involve so you needs to prove do better
Dis advantage of using cash
liquidity Do you have enogh money unless it is small aquistions
Tax issue B 's sharholders becaouae B share hold pay tax immidiately

MV of A X
MV of B X
Synergy there AB X
X Value of new co

No of sahers in aquiri X
Share to B X
Total shares X

Toatal shares in the new co

What is the share value of the new co expected

Value per Value of new co/No of share in the new co

A MV 200 4 4.89
B MV 180 3
Synergy 60
440

A share 90 40
B Share 60
150
A gives 2 share for every 3 shares aquired
Expected change in v 2.933333

Since we aquired B we will give them our share so that both are happy for the sher price increased from where it was .

Type 1 aqcqusitions
This is where business risk and financial risk in Unchanged
Therefore the value of the acquired company is the PV of the PV of the future CFs of the taregate business discounted at the W
Type 2 aqcqusitions
Business risk is UNCHANGED, however the financial risk is changed
e.g. through changing the gearing leveles of the acquirer

Such acquistion may be valued using the adjusted present value (APV) technique by discounting the free cash flow fo ths acqu

Type 3 aqcqusitions
both business risk and financial risk are changed
Inorder to estimiat WACC there is a need to estabilish the cost of capital of the combined businesses
d from where it was .

business discounted at the WACC of the acquire

he free cash flow fo ths acquiree using an geared cost of equity and then adgusting for the tax shiled
 10 10 10 70
9.09 8.26 7.51 47.81
0.1262626 0.229568411387 0.3130478337 2.6561634375 3.3250423089

0 0 20 15 10.00

PV $33.11
NPV ($1.89)

1 2 3 4
5 5 5 105

$103.63

1 2 3 4
5 5 5 105

$96.53

98.57
100 1.43 0.0145074566

0 6 month 1 1 and haf year

Payment te 5000 500 1000 2000

Inflation in penni 5%
Income tax 25%
Cost of capital 10%
Risk adjusted cost of capital 12%
Inflation in Z co 30%

0 6 month 1 1 and haf year

Initial inve -1000
Revenue 500 1000 2000
Labour cost 0 -150 -300 -600
350 700 1400
Tax @ 40% -140 -280 -560
 Project cash -1000 210 420 840
Spot rate 150 196 217 242
(6.67) 1.07 1.94 3.46
Cost of capital @12% 1.01 1.73 2.92
7.53
0.86

Now 175
6 month 196 216.67
1 216.67
1 and haf year 242.46
2 268.25

Currency USD
Penn co
inflation in Penn co 2.75%
Tax @25% 25%
Nominal cost of capital 10%
Risk adjusted rate 12%

Nuruk Euro
Tax @20% in arriers 20%

Years 0 1 2 3 4
Euro Machinary -1000
Revenue 313.50 368.23 636.01 486.81
Material & labour (131) (157) (276) (216)
Fixed cost (40) (42) (45) (48)
Royalty (63) (69) (109) (77)
TAD (50) (50) (50) (50)
(1,000) 28.96 50.13 155.21 96.23
Taxation 20% (5.79) (10.03) (31.04)
Add TAD 50 50 50 50
WC (31.35) (5.47) (26.78) 14.92 9.68
(1,031.35) 73.49 67.56 210.11 124.87
Spot rate (1,320.55) 99.05 95.84 313.85 196.35

7.0666667
TAD
TAD 250 50

Fund will be get in US currency

Royality in $ 85.5 97.5 163.5 121.5
63.44 68.72 109.46 77.27

Wc 31.35 36.82 63.60 48.68

5.47 26.78 (14.92)
0.55 2.68 (1.49)
(31.35) (0.55) (2.68) 1.49

working spot rate 0.781 0.7420 0.7049 0.6695 0.6360

0.06 0.06 0.0566039003 0.0503771255

20x3 20x4 20x5 20x6 20x7
Revenue 1,500 1,590 1,685 1,787 1,894
Operating profit 480 509 539 572 606
Tax@25% (127) (135) (143) (151)
Add back depreciation 125 133 140 148 156
Deduct additional acqustion 210 231 254 280 307
 395 283 291 298 303
252.77 231.86 211.87 192.50
3,094
1,856.31 254 231 212 194
 5

2
1500

1500
-450 0
1050
-420 0
 630
268
2.34
1.87
1.01
1.73
2.92
1.87
7.53
-6.67
0.86

5 6

389.99
(176)
(50)
(57)
(50)
56.27
(19.25) (11.25)
50
39.00
126.02 (11.25)
208.58 (19.61)
 94.5
57.10

39.00
(9.68)
(0.97)
0.97
(33.08)

0.6042 0.5740

-1.26247696
20x8
 312
2,204.86

2219
money market
R
Receipt $800,000 BB SH
C
6.63% 0.016563 1.016563 $786,965.88 1.978 £ 397,859.39 0.01625 1.01625

Pay $ 100.00 Receive $ 400,000.00

Deposit 90.91 borrow Borrow 0.01275 1.01275 $ 394,964.21
Sell low 2 £ 45.45 Exchange r $ 215,110.40
Total cost £ 49.09 Deposit 0.01125 1.01125 $ 217,530.39
£ 404,324.61