Reference no: EM133073034

QUESTION 1 - Piston Limited, South Africa, is a specialist manufacturer of electronic scooters. In seeking to expand its operations, it could acquire a French subsidiary company, Zooter Limited, 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 14,440,000

Cost of machinery 7,700,000

Annual sales 102,000,000

Annual variable cost 24,050,000

Additional head office expenses 1,150,000

Existing head office expenses 2,220,000

Depreciation: machinery 10% on cost annually 1,100,000

Acquisition Euro

Acquire shares from existing shareholders 21,000,000

Redundancy costs 4,000,000

Annual Sales 32,000,000

Annual variable costs 15,000,000

Annual fixed costs 9,000,000

Consultants fees 800,000

Additional information:

- The project is expected to last for 7 years.

- Piston Limited, current cost of capital is 10%.

- The French 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 R23.50 to the Euro (€).

Required - Compute the necessary calculations and advise Piston Traders Limited if it is worth investing in neither, in one or both of these two opportunities.

QUESTION 2 - Lexis Limited, a software development company is contemplating the acquisition of Nexis Limited by means of a share issue. The combination of the two firms' operations will result in economies of scale and the additional value generated is estimated to be R72 000 000. It was agreed that the purchase consideration for the Nexis Limited acquisition should be based on an exchange of 1.2 shares of Lexis Limited for each share of Nexis Limited.

Key acquisition data is detailed below:

Company No. of shares Price per share Earnings after Tax

Lexis Limited 18 800 000 R32 R26 000 000

Nexis Limited 13 200 000 R28 R19 000 000

Required -

1. Calculate the combined value of the proposed acquisition.

2. Calculate the total number of shares in the proposed acquisition.

3. Determine the proposed post-acquisition market price per share.

4. Will the shareholders of Lexis Limited be happy with this price? Why?

5. How much will the shareholders of Nexis Limited gain or lose on a per share basis.

6. Determine the purchase price of Nexis Limited that is implied by the 1.2 exchange ratio.

7. Calculate the net present value of the proposed acquisition.

8. Calculate the proposed acquisition premium.

Compute the earnings per share for Lexis Limited before and after the proposed acquisition.

Assume that the earnings after tax after the proposed acquisition is R45,000,000.