QUESTION 2 (25 Marks) Limpopo Limited, South Africa, is a specialist manufacturer of security doors and gates. In seeking to expand its operations, it has the opportunity to acquire a Dutch subsidiary company, Baboo Guard, or set up a new division in its home market. The relevant figures for these two options are: Set up new division at home Rand Cost of setting up premises 95 000 000 Cost of machinery 38 000 000 Annual sales 106 000 000 Annual variable cost 29 000 000 Additional head office expenses 6 000 000 Existing head office expenses 7 600 000 Depreciation: machinery 10% on cost annually 8 000 000 Euro Acquisition Acquire shares from existing shareholders Redundancy costs Annual Sales Annual variable costs Annual fixed costs Consultants fees 42 000 000 12 000 000 138 000 000 34 000 000 17 000 000 16 000 000 Additional information: - The project is expected to last for 10 years. - Limpopo Limited, current cost of capital is 12% - The Dutch inflation is expected to be below the South African inflation by 1% per year, throughout the life of this investment - The current exchange spot rate is R17 to the Euro (). Required: 2.1 Make all necessary calculations for the two options, Advise Limpopo Limited on the viability of these two opportunities (22 marks) 2.2 (3 marks) (25 Marks) QUESTION 3 You have been appointed as a financial consultant by the directors of Stark Holdings. They require you to calculate the cost of capital of the company. The following information is available on the capital structure of the company 1 500 000 Ordinary shares with a market price of R3 per share. The latest dividend declared was 90 cents per share. A dividend growth of 13% was maintained for the past 5 years. 1 000 000 12%, R1 Preference shares with a market value of R2 per share. R1 000 000 9%, Debentures due in 7 years and the current yield-to-maturity is 10% R250 000 14% Bank loan, due in December 2022. Additional information: 1. The company has a tax rate of 30% 2. The beta of the company is 1.4, a risk free rate of 9% and the return on the market is 18% Required: 3.1 Calculate the weighted average cost of capital (WACC). Use the Gordon Growth Model to calculate the cost of equity (22 marks) Calculate the cost of equity, using the Capital Asset Pricing Model. (3 marks) 3.2 QUESTION 4 (25 Marks) 4.1 Differentiate between a horizontal merger and a vertical merger (4 marks) 4.2 To determine the gains from an acquisition, we need to first identify the relevant incremental cash flows, or the source of value. Acquiring another firm only makes sense if there is some concrete reason to believe that the offered firm will be worth more in our hands than it is worth now. There are a number of reasons why this might be so Discuss in detail ANY SEVEN (7) benefits associated with acquisitions. (21 marks) END OF PAPER QUESTION 2 (25 Marks) Limpopo Limited, South Africa, is a specialist manufacturer of security doors and gates. In seeking to expand its operations, it has the opportunity to acquire a Dutch subsidiary company, Baboo Guard, or set up a new division in its home market. The relevant figures for these two options are: Set up new division at home Rand Cost of setting up premises 95 000 000 Cost of machinery 38 000 000 Annual sales 106 000 000 Annual variable cost 29 000 000 Additional head office expenses 6 000 000 Existing head office expenses 7 600 000 Depreciation: machinery 10% on cost annually 8 000 000 Euro Acquisition Acquire shares from existing shareholders Redundancy costs Annual Sales Annual variable costs Annual fixed costs Consultants fees 42 000 000 12 000 000 138 000 000 34 000 000 17 000 000 16 000 000 Additional information: - The project is expected to last for 10 years. - Limpopo Limited, current cost of capital is 12% - The Dutch inflation is expected to be below the South African inflation by 1% per year, throughout the life of this investment - The current exchange spot rate is R17 to the Euro (). Required: 2.1 Make all necessary calculations for the two options, Advise Limpopo Limited on the viability of these two opportunities (22 marks) 2.2 (3 marks) (25 Marks) QUESTION 3 You have been appointed as a financial consultant by the directors of Stark Holdings. They require you to calculate the cost of capital of the company. The following information is available on the capital structure of the company 1 500 000 Ordinary shares with a market price of R3 per share. The latest dividend declared was 90 cents per share. A dividend growth of 13% was maintained for the past 5 years. 1 000 000 12%, R1 Preference shares with a market value of R2 per share. R1 000 000 9%, Debentures due in 7 years and the current yield-to-maturity is 10% R250 000 14% Bank loan, due in December 2022. Additional information: 1. The company has a tax rate of 30% 2. The beta of the company is 1.4, a risk free rate of 9% and the return on the market is 18% Required: 3.1 Calculate the weighted average cost of capital (WACC). Use the Gordon Growth Model to calculate the cost of equity (22 marks) Calculate the cost of equity, using the Capital Asset Pricing Model. (3 marks) 3.2 QUESTION 4 (25 Marks) 4.1 Differentiate between a horizontal merger and a vertical merger (4 marks) 4.2 To determine the gains from an acquisition, we need to first identify the relevant incremental cash flows, or the source of value. Acquiring another firm only makes sense if there is some concrete reason to believe that the offered firm will be worth more in our hands than it is worth now. There are a number of reasons why this might be so Discuss in detail ANY SEVEN (7) benefits associated with acquisitions. (21 marks) END OF PAPER