a Question 2 [35] Top Fashion (Pty) Ltd is a leading clothing retailer with outlets in the smaller towns in Mpumalanga. Dresswell (Pty) Ltd is in direct competition with Top Fashion but with fewer retail outlets. Top Fashion's executive committee (EXCO) intends to increase the company's market share by opening more outlets in previously unserved towns and by taking over Dresswell and consolidating the retail outlets in the towns where both are competing at present. Should EXCO proceed with the takeover, then Dreswell will represent 35% of the value of the new company. EXCO appointed a project team to analyse Top Fashion, Dresswell's and the market's risks and returns for purposes of assessing the intended takeover. The project team calculated and presented the following information to EXCO for further consideration: Top Fashion (TF) Dresswell (D) Market (M) Actual returns 12% Standard deviation (0) 3% 1% 2% Variance (c) 0.08% 0.02% 0.03% COV(TF,D) COV(TF,M) (0.02) COV(OM) (0.01) Correlation (PTFM) (0.4) Correlation (PDM) (0.05) 11% 10% 0.01 Additional information: The current yield on SA treasury bonds (5 years) is 7%. Required: Show all calculations and round off all answers to two decimals. 2.1. Use the information prepared by the project team to calculate the following for Top Fashion's EXCO: 2.1.1. The beta coefficient values for both companies (8) 2.1.2. Top Fashion's cost of equity (5) 2.1.3. Top Fashion's expected return and risk should it proceed to take over Dresswell (13) In your opinion, should Top Fashion's EXCO proceed with the takeover of Dreswell? Provide reasons for your answer. 2.2. (9) a Question 2 [35] Top Fashion (Pty) Ltd is a leading clothing retailer with outlets in the smaller towns in Mpumalanga. Dresswell (Pty) Ltd is in direct competition with Top Fashion but with fewer retail outlets. Top Fashion's executive committee (EXCO) intends to increase the company's market share by opening more outlets in previously unserved towns and by taking over Dresswell and consolidating the retail outlets in the towns where both are competing at present. Should EXCO proceed with the takeover, then Dreswell will represent 35% of the value of the new company. EXCO appointed a project team to analyse Top Fashion, Dresswell's and the market's risks and returns for purposes of assessing the intended takeover. The project team calculated and presented the following information to EXCO for further consideration: Top Fashion (TF) Dresswell (D) Market (M) Actual returns 12% Standard deviation (0) 3% 1% 2% Variance (c) 0.08% 0.02% 0.03% COV(TF,D) COV(TF,M) (0.02) COV(OM) (0.01) Correlation (PTFM) (0.4) Correlation (PDM) (0.05) 11% 10% 0.01 Additional information: The current yield on SA treasury bonds (5 years) is 7%. Required: Show all calculations and round off all answers to two decimals. 2.1. Use the information prepared by the project team to calculate the following for Top Fashion's EXCO: 2.1.1. The beta coefficient values for both companies (8) 2.1.2. Top Fashion's cost of equity (5) 2.1.3. Top Fashion's expected return and risk should it proceed to take over Dresswell (13) In your opinion, should Top Fashion's EXCO proceed with the takeover of Dreswell? Provide reasons for your answer. 2.2. (9)
