QUESTION 1.1

You have been appointed as a financial consultant by the directors of Menz Limited. They require you to determine the cost of capital of the company. The following information is available on the capital structure of the company: 1 000 ordinary shares, with a market price of R40 per share. The latest dividend declared was R5 per share. A dividend growth of 12% was maintained for the past 5 years. Cash reserves equal to R100 000. 500 13%, R30 preference shares, with a market value of R32 per share. R20 000 10%, debentures due in 5 years and the current yield-to-maturity is 11%. R12 000 15%, bank loan, due in December 2026.

Additional information:

The company has a tax rate of 28%. The beta of the company is 1.2, a risk free rate of 7% and the return on the market is 12%.

Calculate the weighted average cost of capital. Use the Gordon Growth Model to calculate the cost of equity.

Calculate the cost of equity, using the Capital Asset Pricing Model.

1.2

Zayn Transporters has determined that a new specialised delivery truck needs to be purchased. The truck will generate a positive net present value NPV of R780 000, calculated using the companys WACC of 19%. The truck can be leased from the manufacturer. The lease agreement requires 5 annual end of year payments of R280 500 with annual maintenance cost amounting to R40 000. Alternatively, the truck can be purchased at a cost of R1.25 million, inclusive of a 5-year maintenance contract with the manufacturer. The truck can be depreciated straight-line over the same period and will have a zero-market value at the end of 5 years. Insurance costs are expected to be R2 000 per month over the 5 years. You may assume that the current corporate tax rate is 28% and the after-tax cost of debt is 13%.

Determine the after-tax cash flows and the net present value of the cash outflows under each alternative.

Briefly indicate which alternative should be recommended.

1.3

Sherwood Limited is an American based manufacturer of heavy-duty equipment. The company is currently investigating two projects for expansion. It can only undertake one of them and has asked your advice in deciding which one to proceed with.

Project Bella:

Production at the existing factory could be expanded. The cost of the new plant for this option would be an initial outlay of $121 000 000. This would result in an additional $12 200 000 profit being earned in each of the 6 years that the project would last. The new plant to be fully depreciated over the 6 years, on a straight-line basis, in accordance with the company's accounting policy. The financial team has also determined that the new plant must bear its share of the existing overheads and that amounted to $320 000 per annum. These expenses were also included in the profit calculation. Consultant fees cost $10 000.

Project Bow:

Production could be increased by purchasing a new manufacturing facility in South Africa. The cost of the facility would be an initial outlay of R320 000 000. Annual sales for the 6-year period are expected to be R92 000 000, and fixed and variable cost of R13 million and R3 million respectively. Depreciation is calculated using the straight-line method. Consultants fees are expected to be R1 250 000.

Additional information:

* The South African inflation is expected to exceed the American inflation by 2% throughout the life of the project.

* Sherwood Limiteds cost of capital is currently 9%.

* The current spot exchange rate is R16.44/$.

Advise Sherwood Limited which project they should undertake, showing your calculations and assumptions to support your advice 4.1 (22 marks)

Advise Sherwood Limited if it is worth investing in neither, in one or in both of these projects (3 marks)

Pinky Retailers is a dairy company which is in the process of negotiating the acquisition of Brain Wholesalers. The management estimates that the acquisition will result in economies of scale and the additional benefits will amount to R36 000 000. Pinky Retailers is prepared to make a cash payment of R178 000 000 for Brain Wholesalers.

The following information is available for the two companies:

	Pinky Retailers	Brain Wholesalers
Earnings per share	R64.00	R56.00
Number of shares	3 200 000 shares	2 750 000 shares
Market value per share	R75.00	R60.00

Determine the market price per share after the proposed take-over. (8 marks)

Calculate the net present value of the proposed take-over. (3 marks)

Calculate the take-over premium. (3 marks)

Determine the exchange ratio based on earnings per share. (2 marks) Assume that the take-over (acquisition) was based on earnings per share.

Calculate the benefits, if any, for both parties based on the post take- over earnings per share (9 marks) Assume that the take-over (acquisition) was based on earnings per share.