Mathole Ltd., a retail company listed on the Johannesburg Stock Exchange, acquired Elias (Pty) Ltd on...

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Mathole Ltd., a retail company listed on the Johannesburg Stock Exchange, acquired Elias (Pty) Ltd on 31 July 2023. Mathole Ltd. is considering various financing alternatives for the acquisition: Option 1: Cash settlement out of the cash reserve of R16 million. Option 2: Obtaining a R16 million-rand loan from Manikus bank. The loan bears interest of 1% above the prevailing prime overdraft rate and represents the company's incremental cost of borrowing. The capital portion of the loan is repayable in one bullet payment at the end of four years. Interest is calculated and compounded annually in arrears and paid to the outstanding loan balance every year. Option 3: Issue of compulsory convertible preference shares with a par value of R16 000 000. Preference shareholders are entitled to an annual dividend calculated as 80% of the prevailing prime overdraft rate multiplied by the par value of the shares held. Mathole Ltd. is required to pay the preference dividends annually in arrears. Each preference share will automatically convert into one ordinary share after four years. Analysts predict that the value of the converted shares at the end of year four will amount to R17 800 000. Additional information 1. The current prime overdraft rate is 10% per annum. 2. Elias (Pty) Ltd. is expected to generate positive cash flows. 3. Mathole Ltd. will have sufficient cash reserves post-acquisition should cash be utilised to fund the acquisition. 4. Market Analysts predict a prolonged downturn in economic activity in the next 6 months. Required: (i) Instructions: 1. Make use of Microsoft Excel, cell referencing, functions and formulas. 2. Present the solution in Normal and Formula view. 3. Breakdown of mark allocation: a. Medium term loan (Normal view- 8 Marks; Formula view - 4 Marks) b. Preference shares (Normal view - 3 Marks; Formula - 2 Marks) (ii) Calculate the internal rate of return of options 2 and 3. Discuss any factors Mathole Ltd. should consider when deciding which instrument to use. [10 Marks] Use the following table: Medium term loan 14 Preference shares (iii) Discuss the advantages and disadvantages of using cash reserves for the acquisition. [7 Marks] *Consider factors such as liquidity, the economy, dilution, capital structure during your discussion. Structure your answer in the table format below: Advantages [17 Marks] Disadvantages HPFM440-1-Jul-Dec2023-FA2-LM-V6-06062023 iv) Explain the impact that choosing a bank loan finance the investment would have on Mathole Ltd.: 15 (a) Cost of Equity (b) Cost of debt *Note to student: Consider the seniority ranking level of the source of finance against other sources of finance, risks, impact on overall debt and the cost of financing in your discussion. [4 Marks] [4 Marks] HPFM440-1-Jul-Dec2023-FA2-LM-V6-06062023 Mathole Ltd., a retail company listed on the Johannesburg Stock Exchange, acquired Elias (Pty) Ltd on 31 July 2023. Mathole Ltd. is considering various financing alternatives for the acquisition: Option 1: Cash settlement out of the cash reserve of R16 million. Option 2: Obtaining a R16 million-rand loan from Manikus bank. The loan bears interest of 1% above the prevailing prime overdraft rate and represents the company's incremental cost of borrowing. The capital portion of the loan is repayable in one bullet payment at the end of four years. Interest is calculated and compounded annually in arrears and paid to the outstanding loan balance every year. Option 3: Issue of compulsory convertible preference shares with a par value of R16 000 000. Preference shareholders are entitled to an annual dividend calculated as 80% of the prevailing prime overdraft rate multiplied by the par value of the shares held. Mathole Ltd. is required to pay the preference dividends annually in arrears. Each preference share will automatically convert into one ordinary share after four years. Analysts predict that the value of the converted shares at the end of year four will amount to R17 800 000. Additional information 1. The current prime overdraft rate is 10% per annum. 2. Elias (Pty) Ltd. is expected to generate positive cash flows. 3. Mathole Ltd. will have sufficient cash reserves post-acquisition should cash be utilised to fund the acquisition. 4. Market Analysts predict a prolonged downturn in economic activity in the next 6 months. Required: (i) Instructions: 1. Make use of Microsoft Excel, cell referencing, functions and formulas. 2. Present the solution in Normal and Formula view. 3. Breakdown of mark allocation: a. Medium term loan (Normal view- 8 Marks; Formula view - 4 Marks) b. Preference shares (Normal view - 3 Marks; Formula - 2 Marks) (ii) Calculate the internal rate of return of options 2 and 3. Discuss any factors Mathole Ltd. should consider when deciding which instrument to use. [10 Marks] Use the following table: Medium term loan 14 Preference shares (iii) Discuss the advantages and disadvantages of using cash reserves for the acquisition. [7 Marks] *Consider factors such as liquidity, the economy, dilution, capital structure during your discussion. Structure your answer in the table format below: Advantages [17 Marks] Disadvantages HPFM440-1-Jul-Dec2023-FA2-LM-V6-06062023 iv) Explain the impact that choosing a bank loan finance the investment would have on Mathole Ltd.: 15 (a) Cost of Equity (b) Cost of debt *Note to student: Consider the seniority ranking level of the source of finance against other sources of finance, risks, impact on overall debt and the cost of financing in your discussion. [4 Marks] [4 Marks] HPFM440-1-Jul-Dec2023-FA2-LM-V6-06062023

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To evaluate the three financing options for the acquisition of Ellas Pty Ltd we need to compare the ... View the full answer