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Study Session 7: Corporate Finance

Barbara Carlyle Case Scenario Mock A Morning Session

The most recent bond issue includes a covenant that limits the company’s D/E ratio to 35%. She asks Lee to prepare an analysis for Avignon, using the information in Exhibit 3, to see if the debt covenant will be violated if the company repurchases shares. Info provided:

Book value of equity C$3,600 million

Shares outstanding 200 million

Expected share repurchase price (at market) C$32.00

Cash available for repurchase C$155 million

Debt- to- equity ratio 30.0%

After- tax cost of debt 5.0%

Stock repurchase

Stock repurchase is similar to stock dividends?

I remember it reading somewhere but I’m not sure if it’s stock dividend or stock split

Can someone please help?

Thank you so much! 

Staggered board elections

Corporate governance best practice is to hold annual board elections (not staggered), yet staggered elections make for a pre-offer takeover defense mechanism.  How should I view this contradiction?

Audit committee

Is it mandatory for ALL audit committee members to have previous audit experience? 

Employee stock options

Assuming for example:

  • Grant of options 1 January 2010
  • Vesting of options 1 January 2015

I understand the expense will be recognised between the two above dates, on a straight line basis

However what happens in the option price (and value) increases in between these two dates? Is the amount to be expensed determined at grant date and does not change even if value of the options change?

HHI Concentration Level

If the Post Merger HHI is over 1800 but the Change in Pre- and Post-Merger HHI is LESS than 50, what is the conclusion?