A professional and credible valuation report must be transparent and defensible. The cornerstone of this is the clear disclosure and robust justification of all key assumptions used in the analysis. Assumptions regarding growth rates, discount rates, market multiples, and other critical inputs directly drive the final valuation figure. Without this transparency, an advisor or investor cannot independently assess the reasonableness of the valuation or perform sensitivity analysis. A valuation that simply states a conclusion based on ‘industry practice’ or ‘rules of thumb’ without substantiation is considered an ‘ad hoc’ or ‘kerbside’ valuation, which is unreliable for making significant investment decisions. While the independence of the valuer and the specific techniques used are important, the fundamental flaw in an opaque report is the inability to scrutinize the underlying assumptions, rendering the valuation at best doubtful and at worst unusable.

This question assesses the fundamental distinctions between equity and debt instruments.

Statement I is correct. Debtholders are creditors who lend money to a company and are entitled to a pre-defined, contractual return in the form of interest. This payment is an obligation of the company. In contrast, ordinary shareholders are owners, and their returns (dividends) are not guaranteed. Dividends are paid out of profits at the discretion of the company’s board of directors and are dependent on the company’s financial performance.

Statement II is correct. As owners of the company, ordinary shareholders have the right to vote on significant corporate matters, most notably the election of the board of directors, which oversees the management of the company. Debtholders, being lenders, do not typically have such voting rights or control over the company’s administration.

Statement III is incorrect. In the event of a company’s liquidation, there is a clear order of priority for claims on the company’s assets. Creditors, including debtholders, must be paid before owners. Ordinary shareholders have a residual claim, meaning they are only entitled to receive what is left after all liabilities, including debts, have been settled. Therefore, debtholders have priority over ordinary shareholders.

Statement IV is incorrect. The return for debtholders is capped at the contractually agreed interest rate. They do not have a right to share in the company’s profits beyond this amount. It is the ordinary shareholders who, as the residual claimants and owners, are entitled to all profits remaining after the company has met its obligations, including interest payments to debtholders. Therefore, statements I and II are correct.

This question assesses the understanding of different forms of financing and financial services. Statement I is correct because investment banking activities, such as advising on an Initial Public Offering (IPO), facilitate direct financing. In this process, the issuing company raises capital directly from investors in the capital markets, bypassing traditional intermediaries like commercial banks for the capital-raising function itself. Statement II is correct as commercial banking, which involves accepting deposits from savers and lending them to borrowers, is the classic model of indirect financing. The bank acts as an intermediary, transforming deposits into loans. Statement III is also correct. Providing small-scale financial services like credit and insurance to low-income or self-employed individuals who lack access to traditional banking is the definition of micro-finance and micro-insurance. Statement IV is incorrect. Customer deposits held in commercial banks, particularly demand deposits, are a fundamental component of the money supply (e.g., M1 and M2). They are highly liquid and function as a medium of exchange, fitting the definition of money. Therefore, statements I, II and III are correct.

When determining an appropriate financial structure, a company’s ability to service its debt is paramount. This capacity is heavily influenced by the stability and predictability of its earnings. Businesses in sectors with volatile earnings, such as technology or securities trading, face a higher risk of cash flow shortfalls and are therefore advised to maintain low levels of gearing. In contrast, industries with stable and predictable revenue streams, like utilities, can support higher levels of debt because their ability to meet interest and principal payments is more certain. Furthermore, the nature of a company’s assets plays a crucial role. Companies with substantial tangible, long-term assets can use them as collateral for long-term financing. Conversely, firms whose value is primarily in intangible assets, like software or intellectual property, may find it harder to secure debt financing, pushing them towards lower gearing. While factors like management objectives and market sentiment are relevant, they are secondary to the fundamental analysis of the business’s intrinsic risk profile, which is defined by its earnings volatility and asset composition.

The Internal Rate of Return (IRR) is a key metric in capital budgeting used to estimate the profitability of potential investments. It is defined as the discount rate that makes the Net Present Value (NPV) of all cash flows from a particular project equal to zero. The primary decision rule for the IRR method is to compare the calculated IRR to a benchmark rate. This benchmark represents the minimum acceptable rate of return for the company, often referred to as the hurdle rate, required rate of return, or the cost of capital (such as the Weighted Average Cost of Capital, WACC). If the project’s IRR exceeds this required rate, it implies that the project is expected to generate returns greater than its cost, and it should be considered for acceptance. Conversely, if the IRR is less than the cost of capital, the project is not expected to be profitable enough and should be rejected. Other metrics like the payback period or NPV provide different perspectives on an investment’s viability, but for the specific decision based on the IRR criterion, the comparison to the firm’s cost of capital is the essential step.

A professional valuation is distinguished from an ad hoc or ‘kerbside’ valuation by its rigour, transparency, and context-awareness. Statement I is correct because the disclosure and justification of all key assumptions are fundamental requirements for a credible valuation report. This allows users to understand the basis of the valuation and assess its reasonableness. Statement III is also correct as a valuation’s reliability is heavily dependent on the specialist expertise of the valuer in the specific industry and the reflection of market conditions at a specific point in time. Conversely, Statement II describes a ‘kerbside’ approach, which relies on unverified ‘rules of thumb’ and lacks comparison with actual market data, a practice that is unreliable. Statement IV points to a significant weakness; a robust valuation should include sensitivity or scenario analysis to show how the final figure changes with different assumptions, which provides a more complete picture of potential outcomes. Therefore, statements I and III are correct.

The board of directors has a fiduciary duty to ensure that major corporate decisions, such as significant acquisitions, align with the company’s long-term strategy and risk appetite. While financial metrics like the projected rate of return are a key component of the capital budgeting process, the initial screening of a proposal involves a broader, more strategic assessment. Before committing significant resources to detailed due diligence, the board must first determine if the proposal represents a suitable ‘fit’ with the company’s existing operations, strategic goals, and corporate values. This initial evaluation must heavily weigh non-financial risks, including reputational, political, and environmental factors. A proposal that carries substantial non-financial risks, such as operating in a politically unstable country or engaging in environmentally questionable practices, could be rejected at this early stage, even if it appears financially lucrative. This is because such risks can have a profound negative impact on the company’s market perception, shareholder value, and long-term sustainability, outweighing the potential financial gains. Therefore, a comprehensive assessment of strategic fit and non-financial risks is a critical first step before proceeding to a more detailed financial analysis.

Under Part XIVA of the Securities and Futures Ordinance (SFO), a listed corporation has a statutory obligation to disclose any inside information to the public as soon as is reasonably practicable after the information has come to its knowledge. Inside information is specific information that is not generally known to the public but would, if it were known, be likely to materially affect the price of the listed securities. The failure of a flagship product in clinical trials is a classic example of material, negative inside information. The core principle is to ensure a fair and informed market where all investors have simultaneous access to price-sensitive information. Delaying the announcement to wait for a scheduled reporting date violates the ‘as soon as reasonably practicable’ requirement. Informing only select major shareholders constitutes selective disclosure, which is a serious breach and creates an unfair information asymmetry, potentially facilitating insider dealing. While a company will manage its communications, the primary regulatory duty is the timely disclosure of the material fact itself; this duty cannot be deferred for strategic communication purposes if it results in an undue delay.

Candidates preparing for HKSI examinations must recognize that the financial and regulatory landscape is subject to frequent changes. The examinations are designed to test current knowledge of regulations, laws, and market practices. Therefore, a critical part of the study process involves ensuring that the study materials used are the latest available versions. The HKSI communicates amendments and publishes new editions of study manuals to reflect significant updates. Relying on outdated materials, even if they are only a year old, poses a significant risk as the candidate may be unaware of new rules or changes to existing ones that are examinable. The most reliable source for information regarding study material updates is always the official channel provided by the examining body.

The current ratio is a key liquidity metric calculated as Current Assets divided by Current Liabilities. A higher ratio generally suggests a company is better able to meet its short-term obligations. However, a financial analyst must investigate the underlying reasons for a significant change in this ratio. A large increase in unsold inventory raises current assets, thereby increasing the current ratio. While on the surface the liquidity position appears stronger, this situation is concerning because it may signal a sharp decline in sales, operational inefficiencies, or obsolete stock. This could lead to future inventory write-downs and negatively impact profitability and cash flow. In contrast, issuing long-term debt or selling a non-current asset for cash also increases the current ratio by boosting cash (a current asset) without increasing current liabilities, but these are typically planned financing or investing activities and are not inherently signs of operational distress. Similarly, using cash to pay down accounts payable reduces both current assets and current liabilities by the same absolute amount; for a ratio initially greater than 1, this action mathematically increases the ratio and is often a sign of strong cash management.

This question tests the ability to distinguish between hedging, speculation, and arbitrage in the context of derivatives trading.

Hedging involves using financial instruments to offset the risk of adverse price movements in an underlying asset to which one has exposure. Speculation involves taking on risk by betting on the future direction of a market or asset to profit from price fluctuations, without having an underlying business exposure to hedge. Arbitrage is the practice of simultaneously buying and selling an asset in different markets to profit from a price discrepancy.

Statement I is incorrect. The airline has a real business exposure to the price of jet fuel. By buying crude oil futures, it is attempting to lock in a future cost and protect itself from price increases. This is a classic example of hedging, not speculation.

Statement II is correct. The individual investor has no commercial need for cocoa. The purchase of futures is based solely on a view of future price movements, which is the definition of speculation.

Statement III is correct. The firm is exploiting a price difference for the same instrument (HSI futures) in two different markets. This simultaneous buying and selling to capture a risk-free or low-risk profit is the definition of arbitrage.

Statement IV is incorrect. The company is using a currency swap to manage a mismatch between the currency of its revenues (EUR) and its liabilities (USD). This is a risk management technique to hedge against adverse currency movements, not a speculative act. Therefore, statements II and III are correct.

In the context of mergers and acquisitions, particularly hostile takeovers, the target company’s board may employ various defensive tactics. One such tactic is to seek a friendly third-party bidder to make a counter-offer. This friendly bidder is known as a ‘white knight’. The white knight’s offer is typically more attractive than the hostile bidder’s, whether in terms of price, conditions, or post-acquisition plans for the company’s management and employees. The target’s board supports this bid as a preferable alternative to the hostile one. An ‘opportunist’ or ‘corporate raider’ is a term more commonly associated with the initial hostile bidder, who identifies an undervalued target for acquisition. A ‘concert party’, as defined under the Hong Kong Code on Takeovers and Mergers, refers to persons who, pursuant to an agreement or understanding, actively cooperate to obtain or consolidate control of a company. While the target and the friendly bidder cooperate, the specific term for the friendly bidder’s role is distinct. The ‘primary adviser’ is typically an investment bank or financial institution that provides strategic and financial advice to the target or bidder but does not make the bid itself.

Statement I is correct. Unissued capital is the difference between a company’s authorized share capital (the maximum amount it is permitted to issue) and its issued share capital (the amount that has actually been issued to shareholders). Statement II is correct. This is a fundamental characteristic of preference shares; they have priority (‘preference’) over ordinary shares for the return of capital in a liquidation scenario. Statement III is incorrect. The defining feature of cumulative preference shares is that any unpaid dividends accumulate and must be paid in future years before any dividends can be paid to ordinary shareholders. Non-cumulative preference share dividends would be forfeited if not paid. Statement IV is incorrect. A company can issue new shares up to the limit of its authorized capital, not its issued capital. The issued capital represents shares already in circulation. To issue shares beyond the authorized limit, the company would typically need to seek shareholder approval to increase its authorized capital. Therefore, statements I and II are correct.

In the contemporary corporate finance landscape, the nature of the client-adviser relationship has evolved significantly. While historical principles like ‘my word is my bond’ underscored personal integrity, the modern environment, characterized by complexity and competition, demands a more robust foundation. This foundation is trust. Trust is not merely about personal assurances but is built through consistent, high-quality service, transparency, and placing the client’s long-term interests at the forefront. This is especially critical during periods of uncertainty or when delivering unfavorable news. A firm’s ability to maintain a client’s confidence through open communication, even at the risk of a single transaction’s immediate success, is what secures a sustainable business and long-term relationships. This aligns with the fundamental principles outlined in the SFC’s Code of Conduct, which requires licensed corporations to act honestly, fairly, and in the best interests of their clients.

A core principle of corporate valuation is its inherent subjectivity and time-sensitivity. Statement I is correct because any valuation is fundamentally an estimate based on a set of assumptions about the future. These assumptions, such as discount rates, growth prospects, and market multiples, are heavily influenced by the prevailing economic conditions and market sentiment at the specific point in time the valuation is conducted. Statement II is also correct as it directly follows from the first principle. A valuation is a snapshot in time. If market conditions change significantly (e.g., from a recession to a recovery), the underlying assumptions would be revised, leading to a different valuation outcome. Statement III is incorrect because valuations are not meant to establish a permanent or objective value; they are dynamic and change as new information and market conditions emerge. The idea of a value being ‘independent of transient market conditions’ is contrary to the practice of valuation. Statement IV is incorrect because valuations are highly dependent on the quality and quantity of available information. More detailed disclosures allow for more refined assumptions and analysis, which can and often does materially alter the valuation result. A professional valuation is an evolving assessment, not a definitive, unchangeable calculation. Therefore, statements I and II are correct.

Infrastructure finance deals with funding large-scale public systems and facilities, such as transportation, energy, and water projects. A key characteristic is the financial profile of these projects. They typically require a very large initial capital investment during the construction phase, which can last for several years. During this period, the project generates no revenue and incurs significant costs. Once the project becomes operational, it is designed to generate stable, predictable, and often long-term cash flows. These revenues may come from user fees (e.g., tolls for a bridge), long-term offtake agreements (e.g., a power purchase agreement for a power plant), or availability payments from a government entity. This cash flow profile makes infrastructure assets attractive to long-term institutional investors like pension funds and insurance companies. However, these investments are highly illiquid due to their scale and specialized nature, meaning they cannot be easily bought or sold. The risk profile is also complex, encompassing construction risk (delays, cost overruns), operational risk, demand risk (lower-than-expected usage), and significant political or regulatory risk over the project’s long lifespan.

This question assesses the understanding of the distinct roles of key board committees as mandated by the Hong Kong Corporate Governance Code. Statement I is correct; the Audit Committee’s primary function is to oversee the integrity of financial statements and the effectiveness of internal control and risk management systems. Statement II is also correct; the Nomination Committee is responsible for identifying qualified individuals to become board members and making recommendations for their appointment. Statement III is correct; the Remuneration Committee (also known as the Compensation Committee) is tasked with establishing and reviewing the remuneration policy for executive directors and senior management to ensure it is fair and competitive. Statement IV is incorrect; the final approval of the company’s annual operating budget is a core responsibility of the full Board of Directors, not a specific function of the Nomination Committee, whose focus is on board composition. Therefore, statements I, II and III are correct.

Statement I is correct as a primary driver for companies seeking international listings is to tap into larger and deeper capital pools when their domestic markets can no longer support their funding requirements for expansion. Statement II is also correct because major international markets, with their greater depth and liquidity, often offer more competitive pricing, potentially allowing a company to achieve a higher valuation (e.g., a higher price-to-earnings ratio) than on a smaller, shallower domestic exchange. Statement III is correct as a listing on a prestigious international exchange like the Hong Kong Stock Exchange significantly enhances a company’s global profile and brand recognition. Statement IV is incorrect; major financial centres like Hong Kong are known for their robust and often more stringent regulatory frameworks and higher compliance standards compared to smaller markets. Companies listing on such exchanges typically face increased, not reduced, regulatory oversight and costs. Therefore, statements I, II and III are correct.

Statement I is correct. When an employee or executive exercises a company stock option, they purchase newly issued shares from the company at a pre-determined price. This transaction directly provides new equity capital to the company, making it a primary market activity.

Statement II is correct. Exchange-traded options (ETOs) are derivative contracts traded between investors in the secondary market. The underlying company is not a party to these transactions. Therefore, the buying and selling of ETOs on its stock does not result in any capital being raised for the company itself.

Statement III is correct. This statement accurately captures the fundamental distinction between the two main categories of options. Over-the-counter (OTC) options are customized, non-standardized contracts negotiated privately between two parties (e.g., a client and a financial institution). In contrast, exchange-traded options (ETOs) have standardized contract terms (like expiry dates and strike prices) and are traded on a public, organized exchange like the Hong Kong Futures Exchange.

Statement IV is incorrect. A key feature of OTC options is their lack of liquidity and transferability compared to ETOs. They are not traded on a recognized stock exchange. An OTC contract can typically only be closed out or re-sold through negotiation with the original counterparty, not freely traded in the open market. Therefore, statements I, II and III are correct.

This question assesses the understanding that a company’s valuation is not a static or objective fact, but a subjective assessment based on assumptions and market conditions prevalent at a specific point in time. According to the SFC’s Code of Conduct, particularly General Principle 2 (Diligence), licensed persons must act with due skill, care, and diligence. In the context of corporate finance advice, this includes ensuring that any valuation used as a basis for advice is relevant and current. A valuation prepared during a market downturn would incorporate pessimistic assumptions about future profitability and economic growth. If the market sentiment has since improved, those assumptions are no longer valid. Relying on such an outdated report without a fresh assessment would be a failure of due diligence, as the valuation would not reflect the current potential and risks of the investment.

In the context of managing distressed corporate debt, it is crucial to distinguish between strategies aimed at rehabilitating the borrower (‘workout’) and those focused on recovering the lender’s capital (‘liquidation’). A workout strategy’s primary goal is to preserve the business as a going concern, allowing the financial institution’s funds to remain invested, albeit under restructured terms. This often involves a collaborative effort to address the root causes of the company’s failure. Common workout tactics include financial restructuring (e.g., rescheduling debt payments, reducing interest rates, or converting debt to equity) and operational restructuring (e.g., installing new management, cutting costs, or refocusing the business model). In contrast, a liquidation strategy’s objective is the full or partial return of the institution’s funds. This can be achieved by selling company assets, appointing a receiver to wind up the business, or the lender selling its loan exposure to another party in the secondary market. Legal action against directors or guarantors is a separate recovery tool that can be used in conjunction with either strategy but is not, in itself, a workout plan designed to salvage the company’s operations.

According to the Hong Kong Listing Rules, when a prospectus includes pro-forma financial information, such as financial statements adjusted for a significant disposal, an independent reporting accountant’s report is mandatory. The primary role of the accountants is not to prepare the pro-forma data themselves; that is the responsibility of the company’s directors. Instead, the accountants perform a review to provide assurance. Their report must state whether, in their opinion, the pro-forma financial information has been properly compiled on the basis stated by the directors and that the adjustments are appropriate for the purposes of the pro-forma information. This gives potential investors confidence that the adjusted historical figures, which are meant to show the results of the continuing business, are presented on a reasonable and consistent basis.

A successful takeover requires meticulous planning across three key areas: commercial logic, financial logic, and strategic/tactical acceptability. Statement I addresses the financial logic, ensuring the deal is fundable and does not jeopardize the bidder’s financial stability. Statement II covers the commercial logic, focusing on the synergistic benefits that justify the transaction from a business perspective. Statement III deals with strategic and tactical acceptability by considering the reactions of key stakeholders like minority shareholders and the public, which can significantly impact the success of the bid. Statement IV, however, describes a tactical step (drafting the offer document) that should only occur after the foundational strategic planning and due diligence are complete. Initiating this step prematurely, without a solid plan, is contrary to the principles of careful planning. Therefore, statements I, II and III are correct.

The Codes on Takeovers and Mergers and Share Buy-backs (the ‘Takeovers Code’) and the SFC’s Code of Conduct place a strong emphasis on the independence and objectivity of financial advisers in takeover transactions. The primary duty of an adviser to the target company is to provide impartial advice to its shareholders. Statement I describes a direct and substantial financial conflict of interest. If Apex Capital owns 15% of the bidder, its advice to the target could be biased towards a successful takeover to benefit its own investment, regardless of whether the offer is fair to the target’s shareholders. Statement II presents a significant personal conflict of interest. A close family relationship between the lead adviser and a director of the bidder creates a strong presumption that objective, independent advice cannot be given. The Takeovers Executive would be highly concerned about both situations. Statement III describes a past business relationship. While this relationship must be disclosed to the client and may need to be disclosed in offer documents, it is less likely to be considered an insurmountable conflict compared to a current, direct financial or personal interest, especially as the transaction was completed three years ago. Statement IV is not a conflict of interest, provided that effective ‘Chinese Walls’ (information barriers) are maintained between the corporate finance advisory team and the research department. This separation is a standard regulatory requirement for licensed corporations to manage potential conflicts. Therefore, statements I and II are correct.

Statement I is correct. A scrip dividend scheme offers shareholders the option to receive new shares instead of a cash dividend. When shareholders elect to take scrip, the company retains the cash it would have otherwise paid out. This transaction effectively capitalizes the company’s profits or reserves, increasing the number of shares outstanding and thus enlarging the company’s equity base. Statement II is correct. A key feature of a renounceable rights issue is that the entitlement to subscribe for new shares can be sold by the shareholder in the open market. This provides a mechanism for shareholders who do not wish to or cannot subscribe for the new shares to realize the value of their rights, thereby receiving some compensation. Statement III is incorrect. A rights issue priced above the Net Asset Value (NAV) per share is actually accretive to NAV, not dilutive. While the issue price may be at a discount to the current market price (which can dilute the market price per share), if it is higher than the pre-existing NAV per share, the influx of new capital at this price will increase the total net assets by more than the proportional increase in shares, thus raising the NAV per share for all shareholders. Statement IV is correct. Including warrants or options with a rights issue, particularly with exercise prices set above the current share price, is a common strategy to signal management’s confidence in the company’s future growth prospects. It suggests that management believes the share price will rise above the exercise price, making the warrants valuable. This can make the rights issue more attractive to investors and provides a potential source of future equity funding if the warrants are exercised. Therefore, statements I, II and IV are correct.

Venture capital (VC) financing for early-stage, pre-revenue companies focuses almost exclusively on future growth potential and cash flow dynamics, rather than traditional balance sheet metrics. Statement I is correct because the time to reach cash flow breakeven is a critical milestone indicating when the company can sustain its operations without external funding. Statement II is correct as the cash burn rate determines the company’s ‘runway’—how long it can operate before running out of money—and thus dictates the size and timing of necessary financing rounds. Statement III is incorrect because pre-revenue startups with minimal tangible assets are typically unable to secure senior debt financing; their risk profile is too high for traditional lenders. Statement IV is incorrect because while depreciation is an accounting entry, it is a non-cash expense. VCs are far more concerned with actual cash movements (burn rate) than non-cash accounting items when assessing a startup’s survival and funding needs. Therefore, statements I and II are correct.

In the event of a company’s liquidation, a legally mandated hierarchy of claims, often referred to as the rule of absolute priority, dictates the order in which stakeholders are paid from the company’s remaining assets. Creditors, who are lenders to the company, always have a higher priority claim than the owners (shareholders). Debt instruments, such as corporate bonds, represent a creditor relationship. The holders of these instruments are entitled to the repayment of their principal and any contractually agreed-upon interest. Equity instruments, such as ordinary shares, represent an ownership stake. Shareholders are entitled to the residual value of the company, which is the amount left over only after all liabilities, including payments to all debt holders, have been fully settled. Therefore, the liquidator must first use the available assets to satisfy the claims of all creditors, including bondholders. If and only if there are assets remaining after all creditors have been paid in full, will those residual assets be distributed among the ordinary shareholders on a pro-rata basis.

Statement I is incorrect. While preference shares offer a pre-determined dividend rate, the payment is typically contingent on the company having sufficient distributable profits. It is not an absolute guarantee like interest on a loan and can be deferred or skipped if profits are inadequate, depending on whether the shares are cumulative or non-cumulative. Statement II is correct. A key feature of partly paid shares is the contingent liability they create for the shareholder. In the event of liquidation, the liquidator has the right to ‘call’ for the unpaid portion of the shares’ nominal value to satisfy the company’s debts. Statement III is incorrect. This is a critical error in financial analysis. Hybrid instruments have both debt and equity characteristics. An analyst must examine the specific terms of each instrument. For instance, a convertible bond has debt-like obligations (coupon payments, principal repayment) that affect gearing and debt-service capacity until it is converted. Treating it as pure equity would understate the company’s financial risk. Statement IV is correct. This statement accurately describes the dual nature of a convertible bond. It functions as a standard bond, providing a fixed income stream (coupon) and return of principal, but also contains an embedded call option that allows the holder to convert the bond into a pre-determined number of ordinary shares, thereby participating in the company’s growth if its share price appreciates. Therefore, statements II and IV are correct.

Statement I is correct. The financial adviser to the bidder company has a professional duty to its client to achieve the takeover on the most favourable terms, which often means the lowest price. However, this duty operates within the framework of the Codes on Takeovers and Mergers and Share Buy-backs (the ‘Takeovers Code’). The Takeovers Code, particularly General Principle 1, mandates that all shareholders of the target company must be treated fairly and equally. This creates a potential conflict between the adviser’s commercial objective for its client and its regulatory obligation to ensure the process adheres to the Code’s principles of fairness. Statement II is incorrect. Under General Principle 3 of the Takeovers Code, the board of the target company must act in the interests of the shareholders as a whole. A financial adviser has a duty to advise the board to this effect. Advising the board to reject a superior offer for personal reasons would be a breach of this duty and the principles of the Code. Statement III is correct. A ‘white knight’ is a term used to describe a friendly party that the target company’s board invites to make a competing offer. The intention is to provide a more favourable alternative to a hostile bid, often with the goal of preserving the company’s current management and strategy. Statement IV is incorrect. A corporate raider is an opportunist who typically seeks short-term financial gain, not long-term strategic growth. Their methods may include acquiring a significant stake to force a share buy-back at a premium, initiating a proxy fight, or breaking up the company to sell its assets. Their interests are often directly opposed to those of the incumbent management. Therefore, statements I and III are correct.

This question tests the fundamental understanding of the ‘absolute priority rule’ in corporate finance, which dictates the order of claims on a company’s assets during liquidation. Debt holders, such as bondholders, are considered creditors of the company. They have a contractual claim to the repayment of their principal and any accrued interest. This claim is senior to the claims of equity holders. Equity holders, or ordinary shareholders, are the owners of the company. Their claim is residual, meaning they are only entitled to the assets remaining after all the company’s liabilities, including its debts to bondholders and other creditors, have been fully satisfied. In many liquidations, if the assets are insufficient to cover all debts, shareholders may receive nothing. The other options touch upon related but distinct concepts. While shareholders do have voting rights in general corporate matters, and their liability is limited, the most critical distinction in a liquidation context is the priority of their financial claim versus that of a creditor.