ACCA Strategic Professional · Advanced Financial Management

Business re-organisation: formula sheet

Full chapter guide

Key formulas

Value created by reorganisation: Gain = (Value of parts after reorganisation) − (Value of the whole before) − costs and tax; Use this to judge whether the reorganisation is worthwhile. Include transaction costs and any tax on disposal.
Gain or loss on sell-off: Gain = Sale proceeds − (Value of the division to the group if kept); Compare the proceeds with the value in use (for example the PV of its future cash flows), not with book value alone.
Net proceeds from a carve-out: Cash raised = Number of shares sold × Offer price − issue costs; The parent normally keeps control if it retains a majority of the voting shares. This depends on the voting rights attached to the shares and on any shareholder agreements, so check them in the scenario.
Spin-off share allocation: New shares received = Existing shares held × Spin-off ratio; Shareholders get the new shares pro rata, so total shareholder wealth changes only if value is created or lost.
Liquidation priority of payment (illustrative general order): Fixed charge holders (from their secured assets) → liquidation costs → preferential creditors → floating charge holders → unsecured creditors → shareholders; This is an illustrative general order, not a fixed rule. The exact ranking depends on the jurisdiction. For example, some regimes set aside a part of floating charge assets for unsecured creditors. Say so, and apply the order the question gives.
Value gain from a sell-off: Gain = Sale proceeds (after tax and costs) − Value of the unit if retained; Value if retained is usually the PV of its future cash flows to the group. Sell only if the gain is positive.
Value of unit retained (DCF): Value = Σ Cash flow t ÷ (1 + r)^t, plus PV of terminal value; Use a discount rate that reflects the risk of the unit, not necessarily the group WACC.
Sale proceeds net: Net proceeds = Sale price − Tax on gain − Selling costs − Debt settled with the unit; Check whether debt transfers with the unit. Some questions give equity value, others enterprise value.
Equity carve-out proceeds: Proceeds = Shares sold × Offer price − Issue costs; Parent's retained stake = Total shares − Shares sold. Value the retained stake at the market price.
Group value after unbundling: Post-event value = Value of remaining group + Value of unit (or retained stake) + Cash received; Compare with the pre-event value. Shareholder wealth change = post-event value − pre-event value.
Value per share check: Value per share = Equity value ÷ Number of shares; After a spin-off, a shareholder holds both shares. Add the two values together for the shareholder's total.
Debt service cover: Cash flow available for debt service ÷ (interest + scheduled capital repayment); Lenders want a comfortable margin above 1. Use it to test whether the LBO debt is affordable.
Interest cover: Operating profit (EBIT) ÷ interest; A quick test of gearing risk in a highly leveraged structure.
Gearing: Debt ÷ equity, or debt ÷ (debt + equity); State which definition you use. Compare before and after the deal.
Sources equal uses: Purchase price + fees = debt + VC finance + management equity; Use this to find the missing funding or the equity needed.
Investor's exit value of stake: Exit equity value × investor's percentage holding; Exit equity value = exit enterprise value − net debt at exit.
Annualised return (IRR) on a single investment and single exit: (Exit proceeds ÷ Amount invested)^(1 ÷ n) − 1; Valid when there are no interim cash flows. n is years held.
Cash multiple: Exit proceeds ÷ Amount invested; VCs quote this alongside IRR.
Liquidation return to unsecured creditors: Amount available to unsecured = Net realisable value of assets − secured claims (and any liquidation costs); return per $1 of claim = Amount available ÷ Unsecured claims; If the amount is negative, unsecured creditors get nil. Check the order of priority given in the question.
Post-scheme equity value: Equity value = Going-concern value of the business − Value of debt remaining after the scheme; Include any new cash raised in the going-concern value. Use the value of debt given in the question, not necessarily book value.
Value per share after scheme: Value per share = Post-scheme equity value ÷ Total shares in issue after the scheme; Total shares include existing shares, shares issued to creditors and any new shares issued for cash.
Value of a party's package: Package value = New debt received + Cash received + (Shares received × Value per share); Compare this with the party's liquidation return.
Acceptance test: Party accepts if package value ≥ liquidation return (shareholders: if package value net of any new money paid ≥ 0, and strictly > 0 if they are to be genuinely better off); A rational party accepts if it is at least as well off as in liquidation. It is genuinely better off only if the gain is strictly positive. This is a rule of thumb. Real parties also consider risk, control and relationships.
Net gain to shareholders contributing new money: Net gain = Value of all shares held after the scheme − New cash subscribed − Liquidation return (usually nil); Shows whether putting in new money is worthwhile.
Secured creditor recovery in liquidation: Recovery = lower of (claim, value of security realised); Any surplus on the security joins the pool for unsecured creditors. Any shortfall becomes an unsecured claim.
Recovery per $1 for unsecured creditors: Cash available to unsecured ÷ total unsecured claims; Cash available = net realisation proceeds less liquidation costs less amounts paid to secured creditors from their security. Include any shortfall of secured creditors in the claims.
Fairness test for each stakeholder: Scheme value ≥ liquidation value; Scheme value = cash + market value of new debt and shares received. Use realistic values for new securities, not nominal amounts.
Gain on write-off: Gain = old liability − new consideration (cash + new debt + new shares at nominal); Taken to reserves in the pro forma statement of financial position.
Gearing: Debt ÷ equity, or debt ÷ (debt + equity); State which definition you use. Use market values if given, otherwise book values and say so.
Interest cover: Operating profit before interest ÷ interest expense; Compare before and after the scheme. Use forecast profit, not past profit.

Quick revision

Re-organisation changes structure or capital to create value or avoid failure.
A sell-off sells a division to another party and brings in cash.
A spin-off gives existing shareholders shares in a new separate company, with no cash raised.
A carve-out floats part of a subsidiary to outside investors, usually with the parent keeping control.
Unbundling can unlock value when the parts are worth more apart than together.
An MBO is a buy-out by existing managers. An MBI is a buy-out by outside managers.
Buy-outs rely on high gearing, so check the cash flow cover for debt service.
Reconstruction is usually tested against the alternative of liquidation.
Each stakeholder should get at least what they would get on liquidation, or they have no reason to agree.
Existing creditors may be asked to swap debt for equity, accept lower interest or defer repayment.
New finance often needs to be provided by someone, so check who funds it and what they are offered.
Always end with a clear recommendation, the reasons, and the main risks.

Common mistakes

Treating spin-off and sell-off as the same thing Fix: State the flow. In a sell-off the parent receives cash from a buyer. In a spin-off shareholders receive shares and the parent receives no cash.
Saying a carve-out always means the parent loses control Fix: A carve-out usually sells a minority stake, so the parent often keeps control. Check the percentage sold.
Saying a spin-off raises cash for the parent. Fix: Remember that in a spin-off shares go to existing shareholders free. The parent gets no cash. Only sell-offs and carve-outs bring in cash.
Assuming a carve-out means losing control. Fix: A carve-out normally sells a minority stake. The parent usually keeps control and consolidates the unit. Say so and check the percentage given.
Treating LBO as a type of buyer rather than a financing method. Fix: Say who buys (MBO, MBI) and how it is funded (LBO). A deal can be both an MBO and an LBO.
Saying an MBI is lower risk than an MBO. Fix: State that outsiders lack knowledge of the business, so lenders and VCs see an MBI as riskier.
Valuing new shares at nominal or at the old share price Fix: Value shares at post-scheme equity value divided by total shares after the scheme, unless the question gives a different value.
Forgetting the priority order in liquidation Fix: Pay secured claims first from their assets, then unsecured creditors in proportion to their claims. Shareholders only get what is left.
Ignoring liquidation costs, or forgetting that secured creditors are paid first. Fix: Always deduct costs, pay secured creditors from their security first, and only then divide the rest. Add any security shortfall to unsecured claims.
Valuing new shares or loan notes issued to creditors at nominal value only. Fix: Use the market or estimated value if given. Comment that nominal value can overstate what creditors really receive.

Exam tips

Define each method in one line before you evaluate it. Markers give credit for correct distinctions such as cash to the parent versus shares to shareholders.
Tie every reason to the scenario. A generic list of motives earns far fewer marks than two reasons that use the case facts.
Always include a counter-argument: costs, tax, lost synergies or reduced debt capacity. Balanced answers score on professional skills.
When valuing a division, compare the offer with value in use and explain your assumptions. Do not rely on book value.
Finish with a clear recommendation and the next step, for example test the market or negotiate. A discussion without a conclusion loses marks.
Start every answer by naming who gets the cash and who keeps control. Examiners reward this clear distinction between the three methods.
Link the method to the parent's objective in the scenario: cash need, reducing gearing, a bid defence or refocusing. A recommendation with no link scores low.
Show a short calculation of value before and after, even if the question is mainly discussion. Numbers earn technical marks and support your argument.