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Answer ALL the questions that follow.QUESTION 2 Leeds Limited is looking to expand its operations and increase its market share in the cell phone industry.

Answer ALL the questions that follow.QUESTION 2
Leeds Limited is looking to expand its operations and increase its market share in the cell phone industry. To achieve this,
they are looking to increase its current productive capacity of 100000 cell phones a year by at least 6% for each of the
next 5 years. It is considering two cell phone making machines and is unsure which to purchase:
Cell Phone Machine ABC:
Cell Phone Machine ABC can be imported at a landed purchase cost of R160000 and a further R20000 transport and
installation costs will have to be incurred to get it ready for production. This machine is expected to last 5 years after which
it will be sold at its scrap value of R20000. Net cash flow from the sale of the additional production is expected to be
R58000,R63000,R68000,R72000 and R51000 respectively over the 5-year lifespan of the machine. This machine
will enable Leeds Limited to achieve a 4% increase in productive capacity.
Cell Phone Machine XYZ:
Cell Phone Machine XYZ can be purchased locally for R190000 and will also have a useful life of 5 years. It will not have
any resale value at the end of the 5 years and will be disposed of. Net cash inflows from additional production will amount
to R62000 per annum for each of the five years. This machine will enable Leeds Limited to achieve a 2% increase in
productive capacity.
Additional information:
Leeds Limited requires a return on capital of 12% for all investments made. The depreciation policy is to
depreciate all non-current assets on a straight-line basis. Assume that all cash flows occur at the end of each
financial year except for the initial investment which occurs in period 0.
The capital expenditure committee has indicated that R370000 is available for this capital expenditure. In terms
of the company's capital expenditure policy, only projects with a payback period of less than four years are
accepted.
REQUIRED
You are the financial manager at Leeds Limited and have been asked by the Board of Directors to advise them on which
machine/s to authorise for purchase. Using appropriate capital budgeting techniques which must include the Payback
Period, Net Present Value and Accounting Rate of Return results to compile a report to the Board of Directors detailing
the option that should be chosen.
QUESTION 1
(25 Marks)
Mike Limited, a software development company is contemplating the acquisition of Ross 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 R24 million. It was agreed that the purchase consideration for the acquisition should be based on an
exchange of 1.4 shares of Ross Limited for each share of Mike Limited.
The key acquisition data provided for this acquisition is as follows:
Mike Limited possesses 18.8 million shares with a market price of R32 per share and earnings after tax of R26 million,
whereas Ross Limited has 13.2 million shares with a market price of R28 per share and earnings after tax of R19 million.
Required:
1.1 Calculate the combined value of the proposed acquisition.
(3 marks)
1.2 Calculate the total number of shares in the proposed acquisition.
(2 marks)
1.3 Determine the proposed post-acquisition market price per share. (2 decimal places)
(2 marks)
1.4 Will the shareholders of Mike Limited be happy with this price? Why?
(2 marks)
1.5 How much will the shareholders of Ross Limited gain or lose on a per share basis.
(2 marks)
1.6 Determine the purchase price of Ross Limited that is implied by the 1.4 exchange ratio.
(3 marks)
1.7 Calculate the net present value of the proposed acquisition.
(4 marks)
1.8 Calculate the proposed acquisition premium.
(3 marks)
1.9 Compute the earnings per share for Mike Limited before and after the proposed acquisition. Assume that the
earnings after tax after the proposed acquisition is R35 million.
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