MANAGEMENT ACCOUNTING AND FINANCE MPACSll INDIVIDUAL ASSIGNMENT QUESTION ONE Below you are given a certain amount of nancial information concerning two manufacturing companies. Comus Ltd is contemplating making an offer for the shares of Rex Ltd. The Comus Company is quoted on the stock exchange, but Rex company is not. Comus Company is interested in determining a number of alternative offers that it might make, each based on a technical approach to the subject. Summarised Statements of Financial Position of the companies as at 31 December 2020 are given below: Camus Ltd Rex Ltd ($000's) (3000's) Shareholders\" Funds Ordinary Shares ($1 par value) 200 150 Revenue Reserves 100 50 Current Liabilities _59 ;()_0 _35_0 139 Land and Buildings 25 100 Plant and Equipment 200 75 Current Assets Q: L2; 3.5.9 _0_0 Other relevant data are: Earnings per share $0,20 $0,15 Dividend per share $0,08 $0,10 Expected annual % growth in dividends 10% 8% Sale Price as at 1 January 2020 $4,00 Required: (a) Assuming that the price of a company's equity share equals either (i) the present value of the future dividend stream or (ii) that it is based on some other share price evaluation model of your choosing, calculate a price for the shares of Rex that the shareholders would expect if their company were quoted on the stock exchange. (If a discount rate is to be used in the calculation, it is to be the one that the stock market has used to arrive at the price of shares in Comus Ltd). 0n the basis of this expected price suggest the terms of share for share offer that Comus Ltd might make for the shares of Rex Ltd that is attractive to shareholders. State explicitly how you have arrived at the share price of Rex Ltd. (5 marks) (b) With a share for share exchange, what is the highest offer that Comus could make to Rex shareholders, before the offer results in diluting the earnings per share of Comus? (5 marks) (c) The merchant banker that Comus is using has pointed out that an unusually large proportion of the assets of Rex Ltd are in the form of land and buildings. These have different risk characteristics to productive assets and are located in a desirable commercial district of a town. It has suggested that Comus should take this into account when considering the terms of the offer. How could this affect the offer, and if it is considered important, suggest terms that would allow for the structure of the assets to be acquired. (5 marks) (d) Rex has constructed the following estimates of its future cash ows which it has made available to shareholders. Capital Expenditures Prots after Tax Depreciation Year ($000's) ($000's) (5000's) 1 20 25 7 2 25 30 8 3 15 35 10 4 14 40 11 Each year beyond 4 14 45 12 The cost of capital to Rex Ltd is 8%. Using this information and any other in the question you believe appropriate, what is the minimum price that Rex shareholders are likely to accept in exchange for the assets and liabilities of the company