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Get Started in Shares by Glen Arnold

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Watch out for managers raising profit!

Increased profit is always a good thing, surely? Well, no. Take the case of Dubious Integrity plc. The managers here get increased pay and bonus depending on the size of the business. Dubious Integrity has 20 million shares in issue and made total earnings after tax of £3m last year. So each share earned 15p. These are currently standing in the market on a PER of 12, i.e. £1.80.

It now takes over Victim plc by buying all its shares for £1 each. Dubious Integrity creates another 20 million shares to hand over to the current owners of Victim in return for their shares. Victim produces profits after tax of £1m per year, thus the consolidated company has £4m of profit, and the managers raise their salaries and ...

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