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BUS503 Principles of Commercial Law

Task: Locate its website and review financial statements and management discussion and analysis. Which you conduct a year over year comparative and ratio analysis to measure profitability and liquidi ...

Course

BUS503

Type

Course Work

Subject

Finance

University

University of Southern California

MAFI1B‐9 Management Accounting and Finance

Question

Answered

Question:

UniversityStay has realised that there is decent growth in the laundry services, which is not only benefiting the students in their accommodation but has gained traction from the young professional community in the surrounding areas. They would like to expand this service as a means of creating income to assist in covering overheads such as security, insurance and landscaping during these times of economic downturn.

The consideration as whether to lease or buy the washing machines revolves around the following factors:

  1. One washing machine costs R16 000, plus there is currently a special on dryers where three quality industrial dryers can be bought for only R8 500 each.
  1. The estimated maintenance on both the washing machines and the dryers would amount to R15 000 per year.
  1. These assets will be amortised over a period of four years, as UniversityStay always depreciates their assets according to the wear-and-tear policies of the South African Revenue Service (SARS).
  1. It has been established that the best price to lease a washing machine is R4 000 per year, and R6 500 per dryer per year. The terms of the lease stipulate that lease payments must be paid in advance and that no maintenance costs will be incurred by UniversityStay.
  1. The current pre-tax rate to lend money is 10%, and UniversityStays cost of capital is 15%. Assume a corporate tax rate of 28%.
  • Milpark Education Management Accounting and Finance (Part 2) MAFI1B-9 Online submission summative assessment Memo November 2021  Page 7 of 8

UniversityStay has been approached by one of its biggest competitors, Thuthuka, which has a strong clientele base from their bursary programmes. This strategic move could see both entities expand even further. As it stands, UniversityStay and Thuthuka have R300m and R150m share capital respectively. Additional information about the two entities is given in the table below:

 

UniversityStay

Thuthuka

Shares outstanding

200m

150m

Market price per share

R12

R18

Net profit after tax

R108m

X

Earnings per share

X

R0.45

UniversityStay has approached Thuthuka with the offer below:

  • A one-for-one share offer, as well as a generous cash offer. The total offer amounts to R2.3bn.
  • After successful takeover, the expected increase in net profit after tax is R10m.
  • The Price/Earnings (P/E) ratio is expected to stabilisat 23 after the takeover.

Additional info: The tax rate is 28%.

Required:

Discuss whether it would be viable for UniversityStay to lease or buy the washing machines and dryers, using both quantitative and qualitative considerations.

Evaluate the benefits of the takeover for UniversityStay shareholders, taking into account both quantitative and qualitative considerations.

MAFI1B‐9 Management Accounting and Finance

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BUS503 Principles of Commercial Law

Task: Locate its website and review financial statements and management discussion and analysis. Which you conduct a year over year comparative and ratio analysis to measure profitability and liquidity. Include the following: Create a vertical analysis for the income statement and a horizontal ...

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