QUESTION 2 Alpha Ltd ("Alpha") is a well-known investment entity that owns the controlling interest in various successful entities which Alpha has identified and targeted over the last years. After Alpha's most recent financial yearend, at the end of May 2023, the entity has determined that it has sufficient funds available to pursue another entity with the intention of acquiring it, should Alpha wish to do so. (35 marks) Food Source Ltd ("Food Source") is a food manufacturer that has been on Alpha's radar for a while and has been strategically evaluated by Alpha. Alpha believes that by acquiring Food Source, Alpha can increase Food Source's financial performance and market share by utilising Alpha's business networks, industry know-how, improve the asset utilisation of Food Source's assets and provide more available funds to Food Source. One of Alpha's financial department members, Mr. Smith, has been commissioned to perform a draft valuation of a 60% Food Source shareholding. This 60% shareholding will enable Alpha to control Food Source. Information obtained by Mr. Smith Food Source's targeted capital structure is 0.6: 0.4 debt-to-equity while Alpha's targeted capital structure is 0.65: 0.35 debt-to-equity. Alpha's equity beta is 0.8 while Food Source's equity beta is 1.1. Alpha's cost of debt before tax is 11.97% while Food Source's cost of debt before tax is 12.34%. The average market return of the food industry is 11.25% and the average market return in the investment industry is 11.9%. Alpha will be able to assist in increasing Food Source's earnings before interest and tax at a real rate of 5.1% per annum due to Alpha's resources. This growth will occur for two years before plateauing at a real growth rate of 3.2% per annum thereafter.

QUESTION 2 (35 marks) Alpha Ltd ("Alpha") is a well-known investment entity that owns the controlling interest in various successful entities which Alpha has identified and targeted over the last years. After Alpha's most recent financial yearend, at the end of May 2023, the entity has determined that it has sufficient funds available to pursue another entity with the intention of acquiring it, should Alpha wish to do so. Food Source Ltd ("Food Source") is a food manufacturer that has been on Alpha's radar for a while and has been strategically evaluated by Alpha. Alpha believes that by acquiring Food Source, Alpha can increase Food Source's financial performance and market share by utilising Alpha's business networks, industry know-how, improve the asset utilisation of Food Source's assets and provide more available funds to Food Source. One of Alpha's financial department members, Mr. Smith, has been commissioned to perform a draft valuation of a 60% Food Source shareholding. This 60% shareholding will enable Alpha to control Food Source. Information obtained by Mr. Smith - Food Source's targeted capital structure is 0.6:0.4 debt-to-equity while Alpha's targeted capital structure is 0.65:0.35 debt-to-equity. - Alpha's equity beta is 0.8 while Food Source's equity beta is 1.1 . - Alpha's cost of debt before tax is 11.97% while Food Source's cost of debt before tax is 12.34%. - The average market return of the food industry is 11.25% and the average market return in the investment industry is 11.9%. - Alpha will be able to assist in increasing Food Source's earnings before interest and tax at a real rate of 5.1% per annum due to Alpha's resources. This growth will occur for two years before plateauing at a real growth rate of 3.2% per annum thereafter. - Trade receivables and payables will be increased by 4.4% per annum for the next year and then decrease with 1.7% in the year thereafter. Once this level of investment has been researched, it will be maintained for the foreseeable future. - South African long-term government bonds indicate a retum of 9.8%. - The South African inflation rate is 3.3%. - The South African Income Tax rate for companies is 27%. Food Source's taxable income will be the same as its earnings before interest and tax. Extracts from Food Source's most recent audited annual financial statements: Mr. Smith's draft valuation: Calculations: \begin{tabular}{|c|c|} \hline W1 & \begin{tabular}{l} =R1432000000(100%+5.1%) \\ =R1505032000 \end{tabular} \\ \hline W2 & \begin{tabular}{l} =R1432000000(100%+3.2%) \\ =R1477824000 \end{tabular} \\ \hline W3 & \begin{tabular}{l} Working capital \begin{aligned} 2023 & = Current assets - Trade payables \\ & = R5 830000000 R5 993000000 \\ & = R163 000000\end{aligned} \\ \begin{aligned} Working capital 2024 & \( =-\mathrm{R} 163000000 \times(100 \%+4.4 \%) \\ & =-\mathrm{R} 169520000\end{aligned} \) \\ \begin{aligned} Working capital \( 2025 \& 2026 & =-\mathrm{R} 169520000 \times(100 \%-1.7 \%) \\ & =-\mathrm{R} 166638160\end{aligned} \) \end{tabular} \\ \hline W4 & \begin{tabular}{l} =R1505032000(W1)27% \\ =R406358640 \end{tabular} \\ \hline W5 & \begin{tabular}{l} =R1477824000(W2)27% \\ =R399012480 \end{tabular} \\ \hline W6 & \begin{aligned} Cost of equity & \( =R f+B(R m-R f) \\ & =9.8 \%+0.8(11.25 \%-9.8 \%) \\ & =10.96 \%\end{aligned} \) \\ \hline W7 & \begin{aligned} WACC & \( =(10.96 \%(\mathbf{W} 6)+12.34 \%) / 2 \\ & =11.65 \%\end{aligned} \) \\ \hline W8 & \\ \hline W9 & \begin{tabular}{l} = R 2235272454(W8)60% shareholding \\ = R1 341163472 \end{tabular} \\ \hline \end{tabular} REQUIRED: You are Mr. Smith's manager at Alpha Ltd. By thoroughly reviewing Mr. Smith's valuation of Food Source Ltd, identify and explain any errors that were made. Supplement these errors by providing the correct calculations for each error identified. Present your feedback in the following table format: Round to two decimal places where required