QUESTION ONE

Due to the strain on electricity demand in Cape Town during the cold winter months, Max Steel Limited an iron, steel and aluminum manufacturing company require a new generator costing R458 000. The company has the option to either lease or own the generator.

Cost of leasing: The lease would require annual end of year payments of R125 550 over the four years. Service and insurance costs of R500 per month will be borne by the lessee. The lessee will exercise its option to purchase the asset for R180 000 at the termination of the lease in four years.

Cost of owning: Max Steel Limited could alternatively purchase the new generator for R458 000 cash. This would result in maintenance expenses of R12 000 per annum. Depreciation charges are based on the straight-line method. At the end of the period the generator will be sold at its residual value of R50 000.

The company is in the 28% tax bracket and the after-tax cost of the debt is 15%. 1.1 Determine the after-tax cash outflows and the net present value of the cash outflows under each alternative. Show all calculations (22 marks)

1.2 Which alternative would you recommend? Briefly explain. (3 marks)

QUESTION TWO

Bongani 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 French subsidiary company, 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	420 000
Cost of machinery	250 000
Annual sales	168 000
Annual variable cost	12 000
Additional head office expenses (per month)	500
Existing head office expenses	16 000
Depreciation: machinery 10% on cost annually	25 000
Acquisition	Euro
Acquire shares from existing shareholders	8 000
Redundancy costs	500
Annual Sales	2 000
Annual variable costs	400
Annual fixed costs	700
Consultants fees	800

Additional information:

- The project is expected to last for 5 years. - Bongani Limited, current cost of capital is 11%. - The French inflation is expected to be below the South African inflation by 2% per year, throughout the life of this investment. - The current exchange spot rate is R20 to the Euro ().

2.1 Advise Bongani Limited whether they should invest in either of the projects, showing your calculations and assumptions to support your advice. (25 marks)

QUESTION THREE

The following information relates to three possible capital expenditure projects. However, because of capital rationing, only one project can be accepted.

PROJECT ONE:

Project ONE costs R420 000 and has an expected lifespan of 5 years. The cash flows for each year are R160 000, R140 000, R130 000, R120 000 and R110 000 for each of the respective years. The project will be sold at the end of the 5 years for R20 000.

PROJECT TWO: Project TWO costs R550 000. The company will utilize this project for 5 years after which the asset will be sold for R30 000. The cash flows for years one and two are R200 000 and R140 000 respectively. The cash flow for the remaining three years is R100 000 in each year.

PROJECT THREE: Project THREE has an initial investment of R430 000. The cash flows for the 4 years of the project are R110 000, R65 000, R95 000 and R100 000 respectively for each of the 4 years.

Additional Notes: Cost of capital is 18%

3.1 Calculate the payback period for Project TWO. (Answer must be expressed in years and months) (4 marks) 3.2 Calculate the accounting rate of return for Project THREE. (Answer expressed to 2 decimal places) (6 marks) 3.3 Calculate the net present value of each project. (Round off amounts to the nearest Rand) (12 marks) 3.4 Using the answers from question 3.3, which project should be chosen? Explain why. (3 marks)

QUESTION FOUR

Clover Limited is a dairy company which is in the process of negotiating the acquisition of Bakers Limited. The management estimates that the acquisition will result in synergistic benefits of R50 000. Clover Limited is prepared to make a cash payment of R180 000 for Bakers Limited. Clover Limited currently enjoys an earnings per share of R1.50 with a market value of R2 per share. Whereas, Bakers Limited's earnings per share is 80 cents and the market value per share is R1.15. The total number of shares are 75 000 shares and 50 000 shares for Clover Limited and Bakers Limited respectively.

4.1 Determine the market price per share after the proposed take-over. (7 marks) 4.2 Calculate the net present value of the proposed take-over. (3 marks) 4.3 Calculate the take-over premium. (3 marks) 4.4 Assume that Clover Limited proposes to its shareholders that they are willing to peruse a hostile takeover of Bakers Limited. You are required to discuss SIX (6) possible takeover defenses that Bakers Limited can utilize as a tactic to resist the takeover attempts of Clover Limited. (12 marks)