(Papers) ACET Paper May 2010 "SA5 – Finance"
Q. 1) Trust Consumer Products (TCP) is a listed large consumer
products company specializing in two principal product categories: hair care &
home care products. A quarter of its sales revenue comes from abroad.
TCP is on an acquisition drive to expand its hair care & home care business
in the emerging markets in Asia, Africa and South America.
A close scrutiny of the acquisition strategy pursued by TCP reveals that it
has brought products, brands as well as distribution networks. This has provided
the company with the flexibility to move products across geogr faphies and use
the trade channels to sell multiple products
Currently TPC is considering a Rs. 100 crore acquisition of a listed company
in the Indian market called Keyline Hair Care which manufactures hair colours.
Hitherto TCP has been relying on term loans from financial institutions to
finance its acquisitions. Some of the other financing options available to TCP
for financing this acquisition are i) raising funds from the capital market; and
ii) using mezzanine finance
a) Evaluate the merits and demerits of raising finance from capital market
vis –a- vism using term loans for financing acquisitions.
b) Briefly describe the features of mezzanine finance and evaluate its
appropriateness in the context of this acquisition
c) TPC intends to offer its equity shares in exchange for the equity share of
Keyline Hair Care.
The three typical bases used for determining exchange ratio are:
i) Earnings per Share
ii) Market Price Per Share
iii) Book value Per Share
Critically evaluate these bases for determining the exchange ratio; and
recommend an appropriate basis in the context of this acquisition
d) The CEO of TCP is concerned about the high chances of failure in an
acquisition ; and wants you to develop an appropriate acquisition strategy which
can minimise the chances of such failures. Prepare a note addressed to the Chief
Executive Officer (CEO) of TCP covering the key building blocks (key steps) of
an appropriate acquisition strategy. Your note should, interalia, address the
- Criteria for Acquisition
- Screening & Evaluating Potential Acquisition Candidates
- Process for Valuing an Acquisition
- Managing Post-Acquisition Issues
a) Define Corporate Governance and explain how a company can demonstrate good
b) In a developing country, the insurance industry was opened for private
participation about a decade ago with a condition that at least 33% of the total
equity capital should be divested to the public. Many of the insurance companies
are contemplating to come out with IPOs [Initial Public Offerings] even though
they have not started making profits.
In this country, there are adequate regulations for listing of non-insurance
companies on stock exchanges
The market regulator is contemplating develop regulations regarding listing
of life insurance companies on the stock market including the disclosure norms
for such companies
Discuss the key disclosures that the market regulator would ask life
insurance companies to provide in the offer document in order to ensure
transparency and good corporate governance.
Q. 3) Maxima Mutual Fund (MMF) is planning to launch a close ended Max
The salient features of this product are:
Limited contribution product with maximum contribution period of 3 years
The fund is free to invest in any financial securities
Term of 10 years and at maturity the policy holder is paid the units valued
at the higher of NAV applicable at maturity or the highest NAV during first 7
years of the plan The company plans to levy some extra charges due to investment
a) Suggest two approaches that can be used to structure the underlying
portfolio to meet the investment guarantees.
b) Explain the principal investment risks associated with each of your
approaches in (i) and suggest how these risks may be mitigated.
c) Explain the principal operational risks associated with this product and how
they can be mitigated.
d) You have filed the product with the regulator SEBI for approval. The
regulator has send a list of questions including the following
How is this product fair to the investors and why is it needed from investors
Draft an appropriate reply to the regulator.