You are the financial director of Company ABC Ltd, a company listed on the JSE. You have been tasked with investigating the viability of a takeover of a company listed on the Alt X exchange. Required: Select a company listed on the Alt X exchange. The company can be from any industry and needs to have recent and available financial results (not later than 2017). Prepare a memo for the board of directors that covers the following:

Q1 (40 Marks) Perform a ratio analysis of the target company (the company listed on the Alt X exchange)

The analysis must cover all four categories of ratios, as listed in your CIMA textbooks.

Two ratios per category are required.

The analysis should include the prior year and benchmark comparatives.

The comparative company should be selected from the JSE.

Provide reasons why a specific comparative company was chosen.

The analysis should include a discussion around the working capital strategy of the company.

Q2 (20 marks) Investigate and calculate the cost of equity of the target company.

Estimate the beta of the company, making use of gearing and ungearing of betas. The reference entity should be a company listed on the JSE.

Business risk adjustments should be made at a high level. You are not required to analyse specific risks in detail, and should just conclude on which company you believe is more risky, and then adjust the beta accordingly.

Discuss the final beta used and why beta is important for the investor.

Discuss the impact that the debt of a company has on the beta, the cost of equity, and the cost of capital for that company.

Calculate the cost of equity for the company.

Q3 (35 marks). Perform a valuation of the target company.

The following methods should be used:

- Net asset value

- Dividend method

- P/E multiple.

Discuss the uses, advantages and disadvantages of the methods used.

Discuss why the methods used yield different valuation results, and differ from the price on the JSE.

Recommend whether an offer should be made to the shareholders of the target company.

Assuming that an offer will be made, recommend the price that should be offered to the shareholders of the target company for the takeover, as well as the maximum price that Company ABC should be willing to pay for the target company.

In your discussion, also mention what type of offer should be made (cash vs. paper).