MAC3702 Assignment 2 Semester 2 2023 (Answers)

MAC3702 Assignment 2 Semester 2 2023 (Answers) QUESTION 1 (20 marks) Level II (Pty) Limited (“Level II”) is a manufacturing company that manufactures a wide range of freezers and fridges. Level II wants to expand their product range and is negotiating with Deep-zone (Pty) Limited (“Deep Zone”) which manufactures airconditioning units. Level II wants to acquire 100% of the shares in Deep Zone and believes that valuable synergies exist between the two companies. The following information in respect of Deep Zone is relevant: Deep Zone Abridged statement of comprehensive income for the year ending 31 December 2022 Note 2022 Rand Turnover 977 500 787 750 Less: Raw material – purchased from supplier A 1 207 000 Raw material – purchased from supplier B 1 115 000 Labour costs – manufacturing 2 287 500 Depreciation: Manufacturing equipment 3 92 000 Marketing cost 4 51 750 Share of head office costs 34 500 Net Profit 189 750 Notes 1. The directors of Level II have just entered into an agreement with supplier A for material and components at 75% of the cost that Deep Zone is currently paying. Raw materials purchased from supplier B will cost Level II 10% more than what Deep Zone is currently paying. 2. Level II’s employee salaries fall within a larger salary band than that of Deep Zone’s employee salaries. In order to facilitate a salary adjustment, the labour costs for manufacturing will increase by 15%. 3. Depreciation is calculated at 20% per annum on the manufacturing machine. All assets will be taken over by Level II. 4. Level II has its own marketing division within the company, and projections by the head of marketing show that the total cost will be 80% of what Deep Zone is currently paying. MAC3702 ASSIGNMENT 2 Page 3 of 14 [TURNOVER] QUESTION 1 (continued) Additional information • Level II has an old piece of manufacturing equipment that will be sold immediately after acquisition. It would be sold for R23 000. • The total annual cash flow upon acquisition will occur for the indefinite future. We can therefore assume that the annual cash flow will occur to infinity. • Level II requires a fair rate of return of 20% per annum on new investments. • It is expected that all items of cost and revenue for the division would increase at 14% per annum. • Ignore the effects of taxation. REQUIRED Draft a report to the directors of Level II and give your opinion on the following: (a) Recommend the maximum purchase price for the acquisition of Deep-zone (Pty) Limited. Support your opinion with relevant calculations and provide reasons for your answer. (15) (b) Discuss non-financial factors that should also play a role in the negotiation of the final purchase price. (5) Total for Question 1 [20