Mr Moon is the CEO of Saturn Systems, a very large listed company in the telecommunications business. The company is in a very strong financial position, having developed rapidly in recent years through a strategy based upon growth by acquisition. Currently, earnings and earnings growth are at all-time highs although the company‟s cash reserves are at a low level following a number of strategic investments in the last financial year. The previous evening Mr Moon gave a speech at a business dinner and during questions made some remarks that Pluto Limited was an attractive company with „great assets‟ and that he would be a „fool‟ if he did not consider the possibility „like everyone else‟ of acquiring the company. Pluto is a long established supplier to Saturn Systems and if acquired would add substantially to the market capitalisation of the business. MrMoon‟s comments were widely reported in the following morning‟s financial newspapers and, by 10 am, the share price of Pluto had risen 15% in out-of-hours and early trading. The first that you, Saturn‟s chief financial officer, heard about the issue was when you received an urgent call from MrMoon‟s office. You have just completed a background investigation of Pluto, along with three other potential targets instigated at Saturn‟s last board meeting in May. Following that investigation, you have now commenced a review of the steps required to raise the necessary debt finance for a bid and the procedure you would need to follow in setting up a due diligence investigation of each company. On arriving at MrMoon‟s office you are surprised to see the chairman of the board in attendance. Mr Moon has just put down the telephone and is clearly very agitated. They tell you about the remarks made by Mr Moon the previous evening and that the call just taken was from the Office of the Regulator for Public Companies. The regulator had wanted to know if a bid was to be made and what announcement the company intended to make. They had been very neutral in their response pending your advice but had promised to get back to the regulator within the hour. They knew that if they were forced to admit that a bid was imminent and then withdrew that they would not be able to bid again for another six months. Looking at you they ask as one: „what do we do now?‟ After a short discussion you returned to your office and began to draft a memorandum with a recommendation about how to proceed. Required: a) Assess the regulatory, financial and ethical issues in this case. b) Propose a course of action that the company should now pursue, including a draft of any announcement that should be made, given that the board of Saturn Systems wishes to hold open the option of making a bid in the near future. Question No 24:- Slow Fashions Ltd is considering the following series of investments for the current financial year 2009: Project bid proposals (Rs‟000) for immediate investment with the first cash return assumed to follow in 12 months and at annual intervals thereafter. Project Now 2010 2011 2012 2013 2014 2015 NPV IRR P0801 –620 280 400 120 55 16% P0802 –640 80 120 200 210 420 –30 69 13% P0803 –240 120 120 60 10 20 15% P0804 –1000 300 500 250 290 72 13% P0805 –120 25 55 75 21 19 17% P0806 –400 245 250 29 15% There is no real option to delay any of these projects. All except project P0801 can be scaled down but not scaled up. P0801 is a potential fixed three-year contract to supply a supermarket chain and cannot be varied. The company has a limited capital budget of Rs1.2 million and is concerned about the best way to allocate its capital to the projects listed. The company has a current cost of finance of 10% but it would take a year to establish further funding at that rate. Further funding for a short period could be arranged at a higher rate.

Required:

a) Draft a capital investment plan with full supporting calculations justifying those projects which should be adopted giving: i. The priorities for investment, ii. The net present value and internal rate of return of the plan; and iii. The net present value per dollar invested on the plan.

b) Estimate and advice upon the maximum interest rate which the company should be prepared to pay to finance investment in all of the remaining projects available to it.