TABLE CONTENT
I)Introduction......................................................................................... 2
II)Main ideas:......................................................................................... 2
1)Reason for take over:...............................................................................2
2)Methods to takeover a company:............................................................3
3)There will be some impacts that affect to the company:......................4
4)Methods of investment appraisal to evaluate and rank potential
opportunities ...............................................................................................4
5)The nature of gearing and the potential effects of high gearing on
perceived risk and cost of capital...............................................................5
III)Inconclusion:..................................................................................... 7
Appendix................................................................................................. 8
Reference:............................................................................................. 11
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I)Introduction
Jebb Plc directors have identified a number of projects which they
believe will be successful in increasing the wealth of the shareholders. One of
the proposed projects is the takeover of a rival company that competes with
Jebb plc for market share in their core business. The report will analyze the
reasons behind takeovers and the methods by which such takeovers may take
places together with the potential effects of a takeover. Four method of
investment appraisal will be given with their pros and cos. Moreover, the
nature of gearing and potential effected of high gearing on perceived risk and
cost of capital.
II)Main ideas:
1)Reason for take over:
A takeover is the purchase of one company by another. There are many
reasons behind takeover such as:
a) Market share: the companies want to look toward a higher market share. When
takeover a competitive company, Jebb will have bigger economic of scales, thus, the price
per unit will reduce. The company takes advantage of price competitive. The acquisition of a

shareholders have closely connected, thus if the boards accept the offer, the shareholder also
agreed. Private acquisition is friendly. However, if the boards and shareholders reject the
offer, but the bidder still continues to peruse it without inform to them. It is called hostile
takeover.
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There are some advantage for bidding company is they can see exactly how much
is offered and it has no effect to issued shares. However, by cash offer method, the seller
may be liable to pay capital gains tax on shares sold to bidder.
b) Share for Share offer:
The acquiring firm offers its share for an equal number of shares in the target firm. If
accept both shareholders of two companies become owners of resulting company.
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By this
method, the target company shareholders could retain equity interest in their company. There
is no brokerage costs from re-investing cash and no capital gains tax liability. However,
acquiring company might take some disadvantages such as the company should keep the
offer price not fall in market price.
c) Mixed bid:
Mixed bid method is used when a share for share offer is supported by a cash
alternative. It is popular financing choice because it is more accepted by target company’s
shareholder.( Corporate finance book)
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3)There will be some impacts that affect to the company:
a) Economies of scale: Combination of two business will support economies of
scale e.g.: increase in productivity and output, increase cost efficiency, long term cost might
reduce. The larger economic of scale, the bigger of amount of products will be produced
whereas unit cost will decrease.

Moreover, it considers the total benefits associated with the project. It is easy to calculate
and simple to understand
Cons: It ignores the time value of money and the reinvestment potential of a
project. It doesn’t adjust for the greater risk to longer term forecasts.
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c) Net present value
According Financial management book, NPV is one of modern methods for
evaluating the project proposals. It describes as the summation of the present value of cash
inflow and present value of cash outflow. It is the difference between total present value of
future cash inflows and the total present value of future cash outlows.
Pros: It recognize the time value of money. The value of dollar today is more than
the value of a dollar received a year from now. NPV also recognize the risk associated with
future cash flow. It helps to maximize shareholders’ profit.
Cons: It doesn’t tell us when a positive NPV is achieved, it only tell us to accept all
investment with NPV > 0. Furthermore, the method assumes that capital is abundant. There
is no capital rationing.
d) Interest Rate of Return:
Interest rate of return is time adjusted technique and it is a rate at which discount
cash flows to zero. It is calculated by the ratio: Cash inflow/ Investment initial.
Pros: It accounts the time value of money, gives the nearest rate of return. It also
provide guidance on a project’s value and associated risk
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.
Cons: It is complicated to calculate. It produces multiple IRR if evaluating a
project that has more than one change in sign for the cash flow stream. In addition, IRR
assumes that all intermediate cash flows are reinvested at the internal rate.
5)The nature of gearing and the potential effects of high gearing on
perceived risk and cost of capital
a) Source of finance:
Depend on the amount of capital needed, the firm will choose the suitable source of