Deluxe Ltd. (Deluxe) ,a well-renowned automotive manufacturer and retailer with a 31 August financial year-end, is...
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Deluxe Ltd. ("Deluxe) ,a well-renowned automotive manufacturer and retailer with a 31 August financial year-end, is listed in the automotive sector of the JSE. Deluxe continuously expands both organically and by means of acquisitions. Presently, Deluxe is considering the acquisition of a 70% shareholding in Aligned Ltd ("Aligned"). Aligned is a tyre manufacturer that supplies Deluxe with tyres for use in the manufacturing of their vehicles, since Deluxe does not manufacture tyres themselves. The management of Deluxe believes that the acquisition would be beneficial for Deluxe as the entity could then provide in their own tyre needs. It therefore makes strategic sense. Additionally Deluxe will be able to manage both their cost of sales and inventory values better, as they will be able to control the cost of their tyres as well as quantity available. Following are extracts of Aligns and Deluxe's respective most recent financial statements: Align Ltd. Statement of Financial Position as at 30 June 2022 Current Assets Inventory Trade receivables Cash and bank Total Current Assets Non-Current Liabilities Long-term borrowings Total Non-Current Liabilities 2022 R'000 808 3 4 114 6 091 14 013 13 673 13 673 2021 R'000 3775 3 660 9 423 16 858 14 955 14 955 Current Liabilities Trade and other payables Total current liabilities Sales income (Cost of sales) Gross profit (Selling and marketing expenses) (Administration expenses) Align Ltd. Statement of Comprehensive Income for the year ending 30 June 2022 2021 (Other operating expenses) Profit before interest and tax expenses 2022 13 997 13 997 R'000 3 230 (953) 2 277 (139) (370) (501) 1 267 14 121 14 121 R'000 2 976 (883) 2 093 (120) (340) (460) 1 173 Deluxe Ltd. Statement of Financial Position as at 31 August 2022 2022 2021 R'000 R'000 Current Assets Inventory Trade receivables Cash and bank Total Current Assets Non-Current Liabilities Long-term borrowings Total Non-Current Liabilities Current Liabilities Trade and other payables Total current liabilities Sales income (Cost of sales) Gross profit (Selling and marketing expenses) (Administration expenses) 31 227 12 324 11 889 R'000 55 440 67 762 67 762 43 258 43 258 Deluxe Ltd. Statement of Comprehensive Income for the year ending 31 August 2022 2022 2021 55 770 (25 060) 30 710 (3 809) (2 740) 30 405 10 800 12 090 53 295 R'000 70 302 70 302 44 111 44 111 50 500 (23 771) 26 729 (3 443) (2 507) (Other operating expenses) Profit before interest and tax expenses (10 630) 13 531 (8 443) 12 336 Align's current assets are expected to increase by 12% by the end of 2023 while trade payables will remain constant. Both the current assets and trade payables will increase by 3.5% every year thereafter until 2025. From 2026 onwards, they will both decrease by 2% annually. It is estimated that Align's sales will be able to grow at a real rate of 8.6% per annum for the next 3 years. Thereafter, Align's real growth will stabilise at 4.1% per annu A net operating profit margin of 46.2% is expected within the entity. nnum. Align has a target capital structure of 55:45 debt-to-equity ratio of which the cost of debt (before tax) is 16% Deluxe has an equity beta of 0.87, while Align has an equity beta of 0.76. The inflation rate in South Africa is 3.2% and long-term RSA government bonds offer a return of 10.85%. The average market return of the automotive sector is 12.8%. The South African income tax rate for companies is 28%. Assume that all Align's income and expenses should be included in the income tax calculations. Required: Calculate the maximum purchase price that Deluxe should currently be willing to pay for the 70% Align Ltd. shareholding. Show all workings clearly. (52 marks) Deluxe Ltd. ("Deluxe) ,a well-renowned automotive manufacturer and retailer with a 31 August financial year-end, is listed in the automotive sector of the JSE. Deluxe continuously expands both organically and by means of acquisitions. Presently, Deluxe is considering the acquisition of a 70% shareholding in Aligned Ltd ("Aligned"). Aligned is a tyre manufacturer that supplies Deluxe with tyres for use in the manufacturing of their vehicles, since Deluxe does not manufacture tyres themselves. The management of Deluxe believes that the acquisition would be beneficial for Deluxe as the entity could then provide in their own tyre needs. It therefore makes strategic sense. Additionally Deluxe will be able to manage both their cost of sales and inventory values better, as they will be able to control the cost of their tyres as well as quantity available. Following are extracts of Aligns and Deluxe's respective most recent financial statements: Align Ltd. Statement of Financial Position as at 30 June 2022 Current Assets Inventory Trade receivables Cash and bank Total Current Assets Non-Current Liabilities Long-term borrowings Total Non-Current Liabilities 2022 R'000 808 3 4 114 6 091 14 013 13 673 13 673 2021 R'000 3775 3 660 9 423 16 858 14 955 14 955 Current Liabilities Trade and other payables Total current liabilities Sales income (Cost of sales) Gross profit (Selling and marketing expenses) (Administration expenses) Align Ltd. Statement of Comprehensive Income for the year ending 30 June 2022 2021 (Other operating expenses) Profit before interest and tax expenses 2022 13 997 13 997 R'000 3 230 (953) 2 277 (139) (370) (501) 1 267 14 121 14 121 R'000 2 976 (883) 2 093 (120) (340) (460) 1 173 Deluxe Ltd. Statement of Financial Position as at 31 August 2022 2022 2021 R'000 R'000 Current Assets Inventory Trade receivables Cash and bank Total Current Assets Non-Current Liabilities Long-term borrowings Total Non-Current Liabilities Current Liabilities Trade and other payables Total current liabilities Sales income (Cost of sales) Gross profit (Selling and marketing expenses) (Administration expenses) 31 227 12 324 11 889 R'000 55 440 67 762 67 762 43 258 43 258 Deluxe Ltd. Statement of Comprehensive Income for the year ending 31 August 2022 2022 2021 55 770 (25 060) 30 710 (3 809) (2 740) 30 405 10 800 12 090 53 295 R'000 70 302 70 302 44 111 44 111 50 500 (23 771) 26 729 (3 443) (2 507) (Other operating expenses) Profit before interest and tax expenses (10 630) 13 531 (8 443) 12 336 Align's current assets are expected to increase by 12% by the end of 2023 while trade payables will remain constant. Both the current assets and trade payables will increase by 3.5% every year thereafter until 2025. From 2026 onwards, they will both decrease by 2% annually. It is estimated that Align's sales will be able to grow at a real rate of 8.6% per annum for the next 3 years. Thereafter, Align's real growth will stabilise at 4.1% per annu A net operating profit margin of 46.2% is expected within the entity. nnum. Align has a target capital structure of 55:45 debt-to-equity ratio of which the cost of debt (before tax) is 16% Deluxe has an equity beta of 0.87, while Align has an equity beta of 0.76. The inflation rate in South Africa is 3.2% and long-term RSA government bonds offer a return of 10.85%. The average market return of the automotive sector is 12.8%. The South African income tax rate for companies is 28%. Assume that all Align's income and expenses should be included in the income tax calculations. Required: Calculate the maximum purchase price that Deluxe should currently be willing to pay for the 70% Align Ltd. shareholding. Show all workings clearly. (52 marks)
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