Central Electric Ltd

question 33

Multiple Choice

Central Electric Ltd. (CEL) , cost of capital of 9%, net income after tax of $140 million and 10 million common shares outstanding. It wishes to spin off its higher risk Wi-Fi business unit. Earnings from the business unit represent 20% of CEL net income. The Wi-Fi unit has a cost of capital of 12% and would issue one million common shares. To accomplish the spin-off, what will CEL most likely have to do?

• A) Provide one share for every 10 shares they hold in CEL.
• B) Sell the business to a new set of shareholders for cash. Cash may be retained or distributed as dividends to CEL shareholders.
• C) Provide current shareholders with one share from the new business for each of the shares they hold in CEL.
• D) Provide one share from the new business for every five shares they hold in CEL.
• E) Provide one share from the new business for every four shares they hold in CEL to cover their increased risk.

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Definitions:

Resource Management

The process of planning, allocating, and managing resources effectively, including human skills, assets, and materials.

Data Collection

The systematic approach to gathering and measuring information from varied sources to get a complete and accurate picture of an area of interest.

Dependent Demand

Describes a situation where the demand for one product is directly tied to the demand for another, such as components required to assemble a final product.

Independent Demand

A demand for a finished product that is not dependent on the demand for other products in a company's inventory.