Financial Management Case Study Assignment Solutions
- Number of Words: 5000
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Answer ALL the questions in this section.
Clover Limited, a software development company is contemplating the acquisition of Pamalat Limited by means of a share issue. The combination of the two firms’ operations will result in economies of scale and the additional value generated is estimated to be R84 000 000. It was agreed that the purchase consideration for the Palmalat Limited acquisition should be based on an exchange of 1.5 shares of Clover Limited for each share of Palmalat Limited.
Key acquisition data is detailed below:
|Company||No. of shares||Price per share||Earnings after Tax|
|Clover Limited||20 600 000||R38||R28 000 000|
|Palmalat Limited||15 400 000||R30||R20 000 000|
- Calculate the combined value of the proposed acquisition.
- Calculate the total number of shares in the proposed acquisition.
- Determine the proposed post-acquisition market price per share. (2 decimal places)
- Will the shareholders of Clover Limited be happy with this price? Why?
- How much will the shareholders of Palmalat Limited gain or lose on a per share basis.
- Determine the purchase price of Palmalat Limited that is implied by the 5 exchange ratio.
- Calculate the net present value of the proposed acquisition.
- Calculate the proposed acquisition premium.
- Compute the earnings per share for Clover Limited before and after the proposed acquisition. Assume that the earnings after tax after the proposed acquisition is R45 000 000.
First Choice Limited, a South African-based chocolate manufacturing company, intends to expand its output capacity in order to meet the expected increase in demand from the industry. The company plan is to acquire a new machine from China. They have the option to either lease or purchase the new machinery. The machinery has a cost of R850 000.
The company can lease the machinery under a three-year lease. They have to make a payment of R500 000 at the end of each year. First Choice Limited has the option to buy the machinery at the end of the lease for R169 000 and the financial manager intends on exercising this option. Insurance costs of R12 000 are borne by the lessee.
Alternatively, the company could finance the R850 000 cost of the machinery through its retained earnings, payable upfront. First Choice Limited will also pay an additional R48 000 per year for insurance costs while the current running costs (water and electricity) for similar machines are R52 000 per annum.
Insurance is expected to increase by 7% per annum starting from year two. Due to improvements in the water supply and the use of renewable means of energy in the factory, running costs are expected to decrease at a rate of 9% per annum starting from year two.
Depreciation is calculated using the straight-line method.
Assume that the current corporate tax rate is 30% and the after-tax cost of debt is 11%.
2.1 Determine the after-tax cash flows and the net present value of the cash outflows under each alternative.
2.2 Briefly indicate which alternative should be recommended.
Technifibre Limited explores the option of three capital expenditure projects. However, just one project may be selected due to capital rationing. The cost of capital in 10% and the initial outlays and net cash flows differ for each project. The details of each investment are detailed below:
Investment One will cost R900 000 with an expected scrap value of R60 000 at the end of five years. The expected net cash flows for each of the five years respectfully are R480 000, R420 000, R390 000, R360 000 and R330 000. Investment Two will cost R690 000 with an expected scrap value of R90 000 at the end of five years with an expected annual net cash flow of R600 000, R420 000, R300 000, R300 000 and R300 000 respectively over the expected five-year lifespan of the project. Finally, Investment Three involves an initial outlay of R390 000 with no expected scrap value. The expected net cash flows for Investment Three is R180 000 per annum over the four-year expected lifespan of the investment.
3.1 Calculate the payback period for each investment . (Answer must be expressed in years, months and days
3.2 Calculate the accounting rate of return for Investment (Answer expressed to 2 decimal places)
3.3 Calculate the net present value of each (Round off amounts to the nearest Rand)
3.4 Using the answers from question 3, which project should be chosen? Why.
Southhampton Traders Limited is a South African based manufacturer of Generators, an award-winning generator. The company is currently investigating two investment projects. The information is given below:
Involves extending the company’s production facility in Cape Town. The plant will cost R32 000 000 and is expected to create an additional annual profit of R3 500 000 for the 8 years life of the project.
The following expenses were included in the annual profit:
- Depreciation was calculated on the straight-line method, over the life of project.
- Share of existing overheads, borne by head office amounting to R40 000p.a.
- Additional fixed cost of R65 000 p.a.
Involves setting up an independent manufacturing facility in Taiwan. The cost of the facility would be an initial outlay 45 300 000 Taiwan dollars. This would result in:
- annual profit of 28 000 000 Taiwan dollars, for the 8 years of the project.
- The annual fixed costs and variable costs are 2 000 000 and 1 200 000 Taiwan dollars These costs were not included in the profit calculation.
- Consultant fees of 620 000 Taiwan dollars were included in the calculation of profit for Project
- Southhampton Traders Limited current cost of capital is 11%.
- The Taiwanese inflation is expected to exceed the South African inflation by 2% a. throughout the life of the project.
- The current spot rate exchange is 8 Taiwan dollars to the Rand.
4.1 Compute the necessary calculations and advise Southhampton Traders Limited if it is worth investing in neither, in one or both of these two opportunities.