Phambili (Pty) Ltd is a property development company that is located in North East Pretoria. It owns land in the Dinokeng area. The land is located in Residential and Farming Estates close to Roodeplaat Dam. It owns Agricultural land in Leewfontein Estates and land available for development in Sable Hills Waterfront Estate.

The Agricultural land in Leeuwfontein Estates can be leased to farmers for $300 dollars per acre. Phambili (Pty) Ltd pays the maintenance costs of the land. Its customers are both local and international. For this reason, the prices of its services are denominated in American dollars. The management wishes to expand the company business to other areas in Pretoria or very close to Pretoria. The land available for development can be developed by the company or it can be sold for development.

Recently, the company has received an invitation to bid for two properties in Cullinan.

First Property

This property consists of 1.5 acres of land. It is located next to a major road (R513) going to

KwaMhlanga. 0.7 acres of this land is about to be a subject of a compulsory purchase order by

the local Municipality. The municipality would like to use this land for building housing under

the Reconstruction and Development Programme (RDP). The anticipated selling price of this

land (0.7 acres) to the local municipality is $25 000.

The remaining 0.8 acres of land have a resale value of $190 000 in five years time. Phambili (Pty) Ltd can acquire this land and resale it to a developer at $190 000 in five years time.

Second Property

This property is located in a Country Estate in Cullinan. It consists of 160 acres of land. The local authority will allow only 15 acres of this property to be released for residential housing.

The 15 acres might be released at any time in the next four years. The remaining land (145 acres) will not be available for development.

Phambili (Pty) Ltd has to agree now to pay $1 400 000 for the land beforehand, otherwise, the land will be put up for auction. A local businessman might offer $1 600 000 for the land if it is put up for an auction. The reserve price of the land is believed to be $900 000

Additional information:

The 15 acres for redevelopment in Property two have not been identified specifically. The identification process is likely to be completed by the end of year 4. The 145 acres can only be re-sold once the 15 acres for redevelopment have been identified.

Land Market Value:

Agricultural land	$20 000 /acre
Land available for development	$200 000/acre
Land maintenance cost per acre	$2 500/ pa
Cost of capital for Phambili (Pty) Ltd	19%

Required:

a)	Determine the WACC Pambili should use in valuing Madoda Sibili	[7 marks]
b)	What is the value of Madoda Sibili to Pambili?	[6 marks]
c)	Determine the NPV of the acquisition if Pambili offers R58 in cash for each outstanding share of Madoda Sibili.	[2 marks]
d)	Suppose Pambili offers 800 000 of its shares in exchange for the outstanding shares of Madoda Sibili; determine the NPV of the acquisition.	[7 marks]
e)	Which method of acquisition is the best; given your results in c and d? Give reasons for your answer.	[2 marks]