Briefly explain if the ARR is acceptable or not based on a target rate of return of 20%.

QUESTION 1

Study the article below and answer all questions that follow:

Drug firm Adcock stays in SA hands

Johannesburg - Chile`s CFR Pharmaceuticals said on Friday it would drop its $1.2bn bid for drugmaker Adcock Ingram pSE:Alia] after being thwarted by Adcock`s top shareholder.

"Shareholders are advised that Adcock Ingram and CFR have consulted and are of the common view that there is no prospect that the special resolutions to approve the scheme of arrangement proposed between the company and the holders of Adcock Ingram ordinary shares in relation to the offer from CFR will be approved by the necessary 75% majority," the firms announced in a joint statement.

CFR had offered R12.8bn for South Africa`s second-largest drugmaker in a bid that required approval from shareholders with 75% of Adcock.
Adcock shareholder Bidvest Holdings, which has opposed CFR because it wants to take control of the company, recently raised its stake to 34.5%.

Adcock and CFR said there is no prospect the deal could be approved by the required 75%.

An analyst told Reuters last week that CFR Pharmaceuticals can either walk away or go hostile in a bid to take over Adcock after Bidvest raised its stake in the drugmaker.

"The CFR bid is not going to get approval. It has two options: walk away or go hostile," said Alec Abraham at Afrifocus Securities.

"But if CFR goes hostile, it would be difficult for it to bed down the deal and get synergies out when working with a hostile shareholder. So my guess is CFR will walk away."

httpWwww.fin24.com. (Date accessed 07/02/2014).

Required:

1.1 Calculate the total number of shares to be acquired by CFR based on Adcock`s market value of R70 per share.

1.2 Assume CFR shares are currently trading at $65.60 per share. Determine the exchange ratio based on market values for the proposed acquisition. (Assume $1 = R10.67)

1.3 Recently Bidvest Holdings raised its stake to 34.5% in Adcock. Calculate the number of shares held by Bidvest Holdings in Adcock.

1.4 In light of the above article, discuss the potential gains for the offer or from the proposed acquisition.

1.5 Evaluate whether Adcock should use the `poison pill` tactic or the `white knight` rescue as possible takeover defences against a hostile takeover.

QUESTION 2

Hondai Limited (Ltd) that operate in the automobile industry is considering replacing a machine with a new one that requires a R4 200 000 investment. The operating cash inflows over the next 9 years will be R740 000 per annum and the cash inflow for the 10th year will be R220 000. Thereafter the machine will be sold for R400 000.

The company uses straight-line depreciation. The cost of capital for projects of similar risk is 11%. Ignore taxation.

Required:

2.1 Determine the payback period and state if the investment is acceptable or not. (Assume an acceptable payback period would not greater than 6 years)

2.2 Determine the investment`s Accounting Rate of Return (ARR).

2.3 Briefly explain if the ARR is acceptable or not based on a target rate of return of 20%.

2.4 Calculate the net present value (NPV) and briefly comment on the viability of the proposed investment. Justify why the NPV method is the preferred choice for investment appraisals.