Suggested answers to selected problem questionsPre-takeover price per share of Relaxation plc
EPS [11/(90 ×2)] 0.0611
Price per share (£0.0611 ×14) 0.8556
Price for three shares (3 ×£0.8556) 2.5668
Combined after-tax earnings of the post-takeover business £m
Pre-takeover earnings of Thruster plc 48
Pre-takeover earnings of Relaxation plc 11
Cost savings 8
Total earnings 67
Number of shares Shares (m)
Pre-takeover shares of Thruster plc (170 ×2) 340
Shares issued to Relaxation plc shareholders [(90 ×2)/3] 60
Total shares 400
Earnings per share (£67m/400m) £0.1675
At new P/E ratio each share is worth £0.1675 × 16 £2.68Thus, on the assumption that share price was the only criterion, both sets of shareholders
would welcome the takeover since both will be better off.15.1 Planters plc
The note should make the following points:
l Political risk. The risk of war, civil unrest, unexpected increases in taxes, and restrictions
on remittances of cash from sales to the UK. This risk can be assessed in advance, and
there are commercial services that provide an assessment. Countries with a high polit-
ical risk could be avoided and/or the risk can be insured against.
l Lack of local knowledge. The problems that may arise from not being in touch with the cul-
tural, commercial and legal environment of the country concerned. Probably the best
approach here is to do as much research into these matters as possible before trying to
trade in the market. It seems likely that a government agency will be able to help here.
It might be worth considering employing someone who has a good understanding of the
country and the market as a consultant.
l Foreign currency risk. This is the risk that currency markets may cause sterling to
strengthen against the local currency during the period between making a purchase or
sale and paying or receiving the cash. There are several steps, none of them costless, that
can be taken to cover the risk relating to a credit sale:
lBuy a put option in the foreign currency: that is, buy the right to sell the foreign cur-
rency for a stated amount of sterling at a future time. If sterling holds its value against
the foreign currency, the option need not be exercised.
lBorrow immediately an amount of the foreign currency that, with interest, will grow
to the value of the receipt by the scheduled receipt date. When the receipt occurs, the
loan can be paid off from the proceeds.
lSell the foreign currency, at the close of the sale, for future delivery on the scheduled
date of receipt.
The steps that can be taken to cover the risk relating to a purchase on credit are, more or
less, the opposite to those above.15.2 Pavlov plc
Borrow A$490,196 (that is, A$500,000 ×100/102) and convert this to £188,537 (that is,
A$490,196/2.60). When the three months have elapsed, the borrowing, with interest, will ex-
actly equal A$500,000, which will be paid off from the receipt from the Australian customer.Chapter 15
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