Bei plc is an all-equity financed conglomerate in the UK. It is considering taking over the operation of Jing Ltd. The following information is available: Bei plc 20,000,000 £10 Number of shares issued at £1 each Market price per share Earnings after tax per share Beta Jing Ltd. 2,000,000 £12.5 £1.5 £0.875 0.9 1.8 Chapter 16: Mergers The Board of Directors have identified the following options to finance the proposed acquisition of Jing Ltd. 1. Raise £28 million of new shares to acquire the total control of Jing Ltd. from its existing shareholders. 2. Raise £28 million of 10% perpetual debentures with £20 million face value to acquire the total control of Jing Ltd. from its existing shareholders. The Board expect that, after the acquisition, the combined company could reduce operational costs by £4,000,000 while maintaining the same level of operations as before. Currently both companies are paying corporation tax at the rate of 30%. The risk-free rate is expected to be 5% per annum for the foreseeable future. The current market return is 10% per annum. Required: a. What are the main motives for mergers and acquisitions? b. What are the effects on Bei ple's stock price, capital structure, return on equity and return on debt under each of the two funding options? Advise whether the acquisition should go ahead and which funding option would maximise the company's value. Explain your answer carefully and state any assumptions that you make. a

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