Batch Number : MBA9FM915 Student Number : 128115

ID No: 8902185188082 Surname : MdhlaIose

First Name : Dickson Scotch Assignment ID: 450007

III

I II
MANCOSA ASSIGNMENT COVER PAGE

Student Number: 128115

First Name: Dickson Scotch

Surname: Mdhlalose

ID.Number: 8902185188082

Learning Mode: Distance

Course: Master of Business Administration (MBA9)

Intake: January 2016

Module: Financial Management

Examination venue:Durban

Submission type: First Submission

Postal Address: 4418 ,Phase 4 Kwa GuqaEmalahleni Mpumalanga

South Africa 1034

Work Phone: 062 2199504 Cell No: 0735986397

Email Address: dsskosana@gmail.com

Secondary Email: 128115@students.mancosa.co.za

Number of Attachments: 11

Number of pages in assignment: 25

Number of questions answered: 4

File Names:

FOR OFFICE USE ONLY:

NUMBER OF ATTACHMENTS NUMBER OF PAGES NUMBER OF QUESTIONS

QUESTION NO I MARKER MARKS I MODERATORS MARKS QA CHECK

r t
0
Surname Mdhlalose

First Name/s Dickson Scotch

Student Number 128115

Subject Financial Management

Assignment Number 1

Tutor's Name Mr Peter Osei-Sekyere

Examination Venue Johannesburg

Date Submitted 25 August 2016

Submission (4) First Submission .resubmission

4418 Phase 4 Kwa Guqa
Postal Address eMalahleni

Mpumalanga

1034

E-Mail 128115studnts.mancosa.co.za
(Work) 011 355 8395
Contact Numbers (Home) 073 5986 397

(Cell) 073 5986 397

Course/Intake Master of Business Administration (MBA9) Year One Jan 2016

Declaration: I hereby declare that the assignment submitted is an original piece of work produced by myself.
 CERTIFICATION

This is to certify that this assignment entitled: "The reduction and the upswing of Apple
Inc.: influences impelling the firms progression." submitted in partial fulfilment of the
requirement for the award of the degree of Master of Business Administration (MBA) in
Strategic Management to MANCOSA Graduate School of Business, is my own work:

I have acknowledged the use of another's ideas with accurate citations.

If I used the words of another (e.g., author, instructor, information source), I have
acknowledged this with quotation marks (or appropriate indentation) and proper
citation.
I have checked my work against my notes to be sure I have correctly referenced all
direct quotes or borrowed ideas.
My bibliography includes only the sources used to complete this assignment.
This is the first time I have submitted this assignment (in whole or in part) for credit.
Any proof reading by another was limited to indicating areas of concern which I then
corrected myself.
This is the final version of my assignment and not a draft.
I have kept my work to myself and did not share answers/content with others, unless
otherwise directed by my instructor.
I understand the consequences of violating the University's academic integrity
policies as outlined in the Code of Behaviour on Academic Matters.
By signing this form, I agree that the statements above are true. If I do not agree with the
statements above, I will not submit my assignment and will consult the course instructor
immediately.

Student name: 128115

Signature: DS Mdhlalose Date: 25 August 2016

I MANCOSA GSB 128115

 Table of contents

Definition of Key Terms iv

List of Acronyms and abbreviations v
Introduction 1
1. Question 1 2
1.1 TOTAL NUMBER OF SHARES TO BE ACQUIRED BY CURRO BASED ON
ADVTECH'S MARKET VALUE OF R13 PER SHARE 2
1.2 EXCHANGE RATIO BASED ON THE MARKET VALUE 3
1.3 POTENTIAL SYNERGIES 4
1.4 APPROPRIATE POSSIBLE TAKEOVER DEFENCES THAT
ADVETECH COULD EXPLORE 7
2. QUESTION 2 CLAD AND GLAD LTD RETURNS FOR THE LAST FOUR
YEARS 10
3. QUESTION 3 14
3.1 WEIGHTED AVERAGE COST OF CAPITAL; CAPITAL ASSET PRICING
MODEL 14
3.2 COST OF EQUITY; GORDON GROWTH MODEL 17
4. QUESTION 4 18
4.1 GLASSY ALUMINIUM PURCHASE AND LEASE OPTION 18
4.2 THE MERITS AND DEMERITS OF LEASING 22
5. CONCLUSIONS 24
6. BIBLIOGRAPHY 25

I MANCOSA GSB 128115

 Definition of Key Terms

Leasing: is the process by which a firm can obtain the use of certain fixed assets for which it must make a
series of contractual, periodic, tax-deductible payments (Gitman, 2009).

Lessee: Gitman (2009) defines a lessee as a receiver of the services of the assets under a lease contract.

Lessor: is the owner of assets that are being leased (Gitman, 2009).

Synergy: is the interface or collaboration of two or more firms, substances to produce joint results greater
than the sum of their distinct effects (Firer, Ross, Westerfield & Jordan, 2010).

Acquisition: is a corporate act in which a firm buy's most, if not all of the target firms ownership's stakes to
undertake control of the target firm (Gitman, 2009)

Purchase: is a product or service that has been bought by an individual or business (Gutman, 2009).

M I MANCOSA GSB 128115

 List of acronyms and abbreviations

ZAR South African Rand

NPV Net Present Value
PV Present Value
R Average Return
PVA Present Value of Annuity
PVCRA Present Value of Capital Repayment Amount
BL Bank Loan
Ke Cost of Ordinary Shares (Equity)
Kp Cost of Preference Shares
Kd Cost of Debentures
Kbl Cost of Bank loan

I MANCOSA GSB 128115

 INTRODUCTION

Financial Management is a grouping of two words, 'Finance' and 'Management'. Finance is the
essence of any commercial initiative. No corporate activity can be abstract, without finance (Gitman,
2009). Financial Management is about planning, directing, monitoring, organizing and controlling
monetary resources of an organization, it deals with management of money matters. Therefore,
Management of funds is a perilous feature of financial management.

This assignment will therefore calculate number of shares to be acquired by Curro Holdings,
determine the exchange ratio based on market values for the proposed acquisition. It will discuss
potential synergies for the offeror from the proposed acquisition and evaluate possible takeover
defences for Advetech.

This assignment will calculate standard deviation and evaluate which investment is volatile.
Weighted average cost of capital and cost of equity will be calculated. The lease and purchase option
will be calculated and advantages and disadvantages of leasing will be discussed.

IM I MANCOSA GSB 128115

1. QUESTION 1

1.1 TOTAL NUMBER OF SHARES TO BE ACQUIRED BY CURRO BASED ON ADVTECH'S

MARKET VALUE OF RI3 PER SHARE.

Valuation of target firm

mber of target's shares =
value of target's share

OR

value dthe offer

umber of shares = price per :share

The total number of shares to be acquired by Curro Holdings based on a market value of R13 is 461 538
461.50

M 1 MANCOSA GSB 128115

1.2 EXCHANGE RATIO BASED ON THE MARKET VALUE

Market price per share of the target firm Pt

Exchange Ratio =
Market price per share of the acquiring firm Pc,

R13

R39

This means three shares of the targeted company will be exchanged for one share of the acquiring
company.

El I MANCOSA GSB 128115

13 POTENTIAL SYNERGIES

Gitman (2009), defines a synergy as an additional value that is generated by combining two or more
firms, creating opportunities that would not been available to these firms operating independently.
Therefore, the primary motivation for most mergers is to increase the value of the combined
enterprise. The potential synergies from which Curro Holdings will gain because of the takeover are
discussed as follows:

)=. Revenue enhancement: the joint firm may breed superi revenues than two separate firms may
(Firer et al., 2010). Growth in revenue might ari rom marketing gains, strategic benefits and
increases in market power.

/
Marketing gains: Mergers and acquisitions can produce greater operating revenues from
improved marketing (Firer et a ., 201 . With an established distribution network and brand
name recognition in South , Curro holdings will be able to use these strengths to
market its self-well and increase its sales.
i Strategic Benefits: Some acquisitions promise strategic advantage (Firer et al., 2010). By
acquiring ADvTECH, Curro Holdings will se advantage of the competitive environment to
enhance its management flexibility co eming the firm's future operations and this will help
it enter other businesses well.
Market power: One firm may acquire another firm to increase its market share and market
power (Firer et al., 2010). Thus, Curro Holdings aim in acquiring ADvTECH is based on
reducing competition. Profits can be enhanced through higher prices and reduced
competition for customers. In this case, fees will be in eased due to the ability to dictate
fees structure by generating monopoly profits.

> Cost Reduction: A collective firm may operate more competently than two distinct firms may
(Firer et al., 2010). Therefore, a firm can obtain larger operating efficien in numerous diverse
ways through a merger or an acquisition.

,./ Economic of scale: relate to the average cost per uni f producing goods and services (Firer
et al., 2010). Curro Holdings in its proposal of acquiring ADvTECH will result in low costs
due to mass service facility in the education sector, as a result the average cost in service will
decline as the level of service increases as a consequence the larger the company the extra
economies of scale it enjoys (Gitman, 2009).

I MANCOSA GSB 128115

 Economies of vertical integration: operating economies can be gained from vertical
combinations as well as from horizontal combinat ns (Firer et al., 2010). Curro Holdings
coordinating operations activities' will be eas , as a result, the company diversification to
other lines of business will help it to stab' e its earning streams and thus benefit its owners.
Complimentary resources: Some rms acquire others to make better use of existing
resources or to provide the missing ingredient for success (Firer et al., 2010). Curro Holdings
once acquisition becomes successful, it will be on its full ability to use all underutilised
resources by ADvTECH, such as classrooms, libraries, laboratories and classrooms.

)=- Lower Taxes: Tax gains are regularly a potent incentive for some acquisitions. Tax gain from an
acquisition includes the use of tax losses, the use of unused dbtcapacity, and the ability to write
up the value of depreciable assets (Firer et al., 2010).

Net Operating Losses: Firms that lose mo y at an operating level will not pay taxes, such
firms can end up with tax losses they cannot use (Firer et al, 2010). A merger of these two
firms will lead to risk reduction, low net operating losses and generating a greater debt
capacity and larger tax shield. Curro Holdings and ADvTECH combined will also have a
lower tax bill than two firms considered separately.
Unused debt capacity: Some firms do not use as much debt as they are able. This makes
them potential acquisition candidates (Firer et al., 2010). The combination of Curro Holdings
with ADvTECH will increase their debt capacity therefore; eir earnings and cash flows
may be more stable and predictable. This will allow them borrow more, which in turn will
generate a tax benefit for the two firms, as tax benef manifests itself as a lower cost of
capital for the joint firms.
/ Asset rite-ups: In an acquisition of assets rath7than shares, the assets of the acquired firm
may be re-valued. ADvTECH value of its assets is considered higher than its market value,
therefore Curro Holdings could acquire ADvTECH cheaper since it is hard to start a new
company but better buying an existing one (Gitman, 2009). If the value of the assets is
increased, tax deductions for depreciation will be a benefit for Curro Holdings (Firer et al.,
2010).
Reductions in Capital Needs: businesses must make investments in working capital and non-
current assets to sustain an efficient level of operating activity (Firer et al., 2010). A merger may
lessen the joint savings desired by Curro Holdings and ADvTECH. Curro Holdings may realize
habits of further effectually handling prevailing assets, may also sell of certain assets that are not

I
needed in the combined firm.

MANCOSA GSB 128115

 Evaluating the benefit of a potential benefit acquisition is more difficult than a standard capital
budgeting analysis because so much of the value can come from intangible, or also hard to
quantify, benefits (Firer et al, 2010).

Curro Holdings acquisitions have taken place to also acquire ADvTECH Technological
knowledge; Curro Holdings will find it cheaper to increase its pro tion capacity via acquisition,
and the acquisition between the two firms will results to lo er financing costs. Curro Holdings
have surplus cash resources and decided to use its li idity in order to acquire other firms for
growth.

1 MANCOSA GSB 128115

1.4 APPROPRIATE POSSIBLE TAKEOVER DEFENCES THAT ADVTECH COULD

EXPLORE.

Takeover defences comprises all engagements by managers to battle obligating their firms acquired
(Ruback, 1987). Efforts by target managers to defeat unsettled takeover offers are open forms of
takeover defences. Opposition similarly occurs before a takeover offer is made which makes the
firm harder to acquire. The defences takeover ADvTECH could follow are discussed as follows:

> Exclusionary Self-Tenders: Through exclusionary tenders, A vTECH makes a tender

proposition for a given amount of its stock while discountjpgiiie targeted stockholders (Firer
et al., 2010). This is done as a way of booming Curro Holdings over the endeavoured takeover
through wealth transfer.

> Scorched earth' strategy: ADvTECH directors may sell valua assets in order to make the
take-over less attractive to Curro Holdings. This type of de .sion may not be in the interests of
the shareholders and may have a harmful consequenc on the future operations of ADvTECH
(Firer et al., 2010).

> Share split: ADvTECH should split its shares as a share split m es the issued shares more
marketable, hence, they may be more widely held (Correir,, Flynn, Uliana, & Wormald,
2013).

> Poison Pill: is to stagger the election of the boar of a company, causing the acquiring
company to face a hostile board for a prolonged period of time (Correira et al., 2013).
ADvTECH can bite a pill of cyanide rather than permit capture, as this averts Curro Holdings
probers from learning vital confidences. ADvTECH can take on a debt that would leave the
company overleveraged and potentially unprofitable. ADvTECH s areholders may be issued
with an option to acquire shares cheaply.

> White Knight: A firm facing an unfriendly merger offer rn. ht arrange to be acquired by a
different, friendly firm (Firer et al., 2008). ADvTECH might arrange to,J acquired by a
friendly firm, this can be done by merging with another firm to add value nd increase market
capitalization. This technique will not only defence ADvTECH 4it will also benefit
shareholders in the short term.

> Pyramids: to ensure that control of ADvTECH is maintained wit in, it may arrange a pyramid
group structure whereby a holding company is established to maintain control of the operating
company, therefore a pyramid structure could be created by ADvTECH to entrench control
(Firer et al., 2010).

M I MANCOSA GSB 128115

> Amendments to the memorandum and articles: Articles of association may require that a larger
than 50 per cent majority is necessary for change in specified company policies (Firer et al.,
2010). ADvTECH's directors may introduce certain amendments to the company's
memorandum and articles, which make it more difficult for another company to acquire
control.

> Golden Parachutes: The existing ADvTECH management ay-- enter into employment
contracts with the company so that, if the employment management is terminated, large
lump-sum payments are paid as compensation. ese employment contracts act as a
disincentive for unfriendly take-over bids (C rrta et al., 2013).
.

> Increase Dividends: ADvTECH directors may increase the level of dividends in rder to
acquire loyalty of its shareholder. In order for ADvTECH to obtain support of i shareholders
against the take over-bid by Curro Holdings can increase its normal divide d payment and also
pay out a bonus dividend, this will frustrate Curro Holdings (Correira et al., 2013).

> Asset Restraining: ADvTECH may sell of its existing assets or buy new assets. As a result,
this will increase the firm's value by making the takeover unattractive (Correira et al., 2013).

> Staggered Board Elections: The board of directors is classified into three groups (Ruback,
1981). Each year only one of the groups or one-third of the dire ors is elected. This would
make it hard for Curro Holdings to gain immediate contr9Vof ADvTECH, even if Curro
Holdings owns a majority of the common stock.

> Greenmail: A company may buy back its recently acquired stock from the putative raider at a
higher price in order to avoid the takeover (Firer et al., 2010). ADvTECH can redeem its stock
from Curro Holdings at a substantial premium with the agreement that Curro Holdings will not
acquire ADvTECH for a specified period. This will act as a blockage of shares from falling
into another potential acquirer.

> Legal Actions: ADvTECH may refer the matter to courts to strip of e takeover; this may
result in delayed actions, which may act as an obstacle to C ro Holdings from buying
ADvTECH (Correira et al., 2013). This is on the interest of the ADvTECH's ma agement if it
does not want the takeover to happen.

> Acquiring the acquirer (Pac Man): this strategy is to turn the tables on t acquirer and mount
a bid to take over the raider (Firer et al., 2010). ADvTECH could def d its self by purchasing
Curro Holdings stock; this counter offer will give ADvTECHyortunity to take over the
hostile bidder (Curro Holdings).

MANCOSA GSB 128115

Possibly the best defence of all against potential takeover)k1s that ADvTECH could take is to
make central enhancements to its operations, includin improving profitability, making better
usage of resources and upgrading the eminence of the firm's management (Firer et al., 2008).

Considering all of the options articulated above, all a5ti4ties assumed by the directors would have
to be examined against the director's depositar obligations (Firer et al., 2010). The directors
jseer is fruitful and the directors have breached their
should take inordinate caution, for if the
depositary obligations, the company (under the control of the offer ) may ujthe directors for
breaching of the depositary obligations.

v\P -

MANCOSA GSB 128115

 2. QUESTION 2 CLAD AND GLAD LTD RETURNS FOR THE LAST FOUR YEARS

Clad:

Annual Returns
s Returns Number of Years

0.75
=4

= 0.1875

Average Returns = 0.1875

Clad

Year A Actual Deviation from the Mean, (R-R) C Squared Deviation D(C2)
Returns B

2012 0.50 0.50-0.1875=0.3125 0.09765625

2013 -0.15 -0.15-0.1875=-0.3375 0.11390625

2014 0.30 0.30-0.1875=0.1125 0.01265625

2015 0.10 0.10-0.1875=-0.0875 0.00765625

Total 0.75 0 0.231876

Average
= 0.1875
Return, R 4

MANCOSA GSB 128115

 Variance for Clad (R) = Q2

Variance:

2 0.231875 = 0.077
n 1 4-1

Standard Deviation

iEGR R) 2
i
o- = = 0.077 r-z10.277
n 1
-

0.277 X 100 = 27.75%

Standard deviation 45-.

Coefficient of variation, CV = =
Mean

0.2780
0.1875

CV= 1.4827

M I MANCOSA GSB 128115

 Glad:

Annual Returns
Means Returns =
Number of Years

0.24
4

= 0.06

Average Returns = 0.06

Glad

Year A Actual Deviation from the Mean, (R-1-k) C Squared Deviation

Returns B

2012 0.09 0.09-0.06=0.03 0.0009

2013 0.07 0.07-0.06=0.01 0.0001

2014 -0.12 -0.12-0.06=-0.18 0.0324

2015 0.20 0.20-0.06=0.14 0.0196

Total 0.24 0 0.053

Average 0.24
,1-- .0.006
Return, R

I MANCOSA GSB 128115

Variance for Glad (R) = Q2

Variance:

0.053
o-2 :
7 -
- = = 0.017666666

x n-1 4-1

Standard Deviation:

11Z(R-R)2
a. = =J0.017666666 0.132916011
n 1

0.132916011 x 100 = 13.29%

Standard deviation o-
Coefficient of variation, CV =
Mean. R

0.1329
_
0.06

CV = 2.215

Clad Standard Deviation: 27.75% tandard Deviati n: 3.29%

Clad standard deviation is higher than of glad, thus clad is more volatile.

M I MANCOSA GSB 128115

3. QUESTION 3

3.1 WEIGHTED AVERAGE COST OF CAPITAL; CAPITAL ASSET PRICING MODEL

Value of a debenture
D= Present Value of Annuity (PVA) of interest + PV of Capital repayment amount
= R3 000 000 x 0.6806 + R330 000 x 3.9927
=R2 041 800 +R1 317 591
= R3 359 391

Market Value of Ordinary Shares (Equity) (E)

=No. of Ordinary Shares x Market Price per share = 2 000 000 x R4 = 8 000 000

Market Value of Preference Shares (P)

= No. of Preference Shares x Market Price per Preference Share = 1 500 000 x 2.5 = 3 750 000

Market Value of Bank Loan (BL)

BL= R800 000 (Bank loan is not traded)

Market values Amount Proportion

Ordinary shares 8 000 000 0.51
Preference shares 3 750 000 0.24
Debentures 3 359 391 0.21
Bank loan 600 000 0.04
Total 15 709 391 1
,

I MANCOSA GSB 128115

 Cost of Ordinary Shares (Equity) (Ke)
CAPM:
= Rf +13 (Rm Rf)
Rf Risk free rate
13 Company's beta
Rm Return on market

= 0.09+1.5(0.17-0.09)
= 0.09+ 1.5(0.08)
= 0.09+ 0.12
=21 x 100
=21%

Cost of Preference Share (Kp)

Kp cost of preference share

D Dividend
PO price
13%.KR2
R2.50

0.26
2.50

=0.104X 100
=10.4

I MANCOSA GSB 128115

 Cost of Debentures (Kd)
Kd = YTM (1- Tc)
Kd cost of debt
YTM yield to maturity

Kd= ytm (1-Tax Rate)

= 8%(1-30%)
=8%(0.7)
=0.056x 100
=5.6%

Cost Bank Loan (Kbl)

Kbl= Interest (1 tax rate)
= 0.16 (1 0.3)
= 0.16 (0.7)
= 0.112 x 100
,---- 11.2%

WACC
Ordinary shares 0.51 x21% 10.71%

Preference shares 0.24 x 10.4% 2.5%

Debentures 0.21x5.6% 1.2%

Bank loan 0.04x 11.2% 0.45%

WACC 14.86%

I MANCOSA GSB 128115

3.2 COST OF EQUITY; GORDON GROWTH MODEL.

Ordinary shares
+ 9) g
Cast of equity po

Ke cost of equity
DO latest dividend paid
g growth
PO market price

R0.601(1 + 0.1
Ke =
R4.0

R0.66
Ke =
R4.00

0.165
= 0.265 *100
=26.5%

1 MANCOSA GSB 128115

4. QUESTION 4

4.1 GLASSY ALUMINIUM PURCHASE AND LEASE OPTION

Exchange Rate between Spain and South Africa

ZAR= Euro x Exchange Rate

= 160 000x 10
= 1 600 000

PURCHASE OPTION

Depreciation = (Cost estimated scarp value) / its useful life in years

=(1 600 000 320 000)/5
= 256 000

Annual tax shield = 30% x 256 000

=76 800

Scrap = Cost Price x Percentage of Purchase Price

= 1 600 000 x20%
= 320 000

After tax of debt= Pre-tax cost of debt (1-Tax Rate)

= 14.29%(1-30%)
= 0.10003 x 100
= 10%

I MANCOSA GSB 128115

 nual Service Costs:

ri
Rear Amounts Tax Rate 70% Total

1 7 000 7 000 x 70% 4 900

2 7 000 7 000 x 70% 4 900

3 10 000 10 000 x 70% 7 000

4 10 000 10 000 x 70% 7 000

5 10 000 10 000 x 70% 7 000

Software Licensing Costs:

Year Amounts Total Tax Rate 70% Total

1 6 000 6 000 6 000x 70% 4 200

2 6 000 x 105% 6 300 6 300 x 70% 4 410

3 6 300 x 105% 6 615 6 615 x 70% 4630.5

4 6 615 x 105% 6945.75 6 945.75 x 70% 4862.025

5 6 945.75 x 105% 7293.04 7 293.04 x 70% 5105.128

I MANCOSA GSB 128115

Year 0 1 2 3 4 5
...'
Cost price (1 60 00) - - - - -

Annual - (4 900) (4900) (7000) (7000) (7000 ,,v

Service costs
70%

Software - (4200) (4410) (4630.5) (4862.025) (5105.12V

licensing
costs 70%
I,
,
Tax shield on - 768,0 4 76800 76 800 76 800 76 800/
4
depreciation
30%

Sale residual - - - - - 320 R97

value

Net cash (1 600 000) 67 700 67 490 65169.5 64 937.975 384 694.872
flow

Discount 1 0.9091 0.8264 0.7513 0.6830 0.6209

factor at 10%
pbSrt\w---
1 .--
PV (1 600 000) 107) (55 7 .736) (48 .84535) (44 31.6 (7217.0746)
93)

NPV A791.363)

I MANCOSA GSB 128115

 LEASE OPTION

Annual tax save = 30% x 550 000

= 165 000

Deposit = 40% x 1 600 000

= 640 000

Refund = 10% x 640 000

= 64 000

After tax of debt= Pre-tax cost of debt (1-Tax Rate)

= 14.29% (1-30%)
= 0.10003x 100
= 10%

Year 0 2 3 4 5
Deposit (640 f. -
Lease - (550000) (550000) (550000) (550000) (550 000)7
payments
Tax Rate - 165 000 165 000 165 000 165 000 165 000,Y/
30%
Refund - - 64 000 Z
Net cash (640 000) (385 000) (385 000) (385 000) (385 000) (321 000)
flow
Discount 1 0.9091 0.8264 0.7513 0.6830 0.6209
factor
10%

PV (640 000) (35 003,5) 18 164) (89.<50.5) 26(955) (199 308.9)

NPV (2 R.594-11.9)
----

Cost of Purchase Option: (2 049 491.163); Cost of Lease Option (2 059 681.9), The Purchase Option is t
better of the two options, because cash outflows are less by 10 190.737.
There for best option is to purchase the plant as in accor ith NPV factor this option has a less NPV in
LA\
relation to lease (Weston &ciarn,
rir 2011).

MANCOSA GSB 128115

 4.2 THE MERITS AND DEMERITS OF LEASING

Firms generally own fixed assets and report them on their balance sheets, but it is the use of
buildings and equipment that is important, not their ownership (Gitman, 2009). Leasing is
becoming a preferred solution to resolve fixed asset requirements vs. purchasing the asset. While
evaluating this investment, it is essential for the owner of the capital to understand whether leasing
would yield better returns on capital or not. Consequently, this section will discuss the advantages
and disadvantages of leasing:

Advantages of Leasing

> No Risk of Obsolescence: Lease arrangements yields and protects the lessee against the
risk of obsolescence in regard of the assets, which become obsolete at a faster pace. Tait
(2013) states that since the lessee does not own the asset but only uses it, therefore it is the
responsibility of the lessor to maintain and insure the leased assets.
> Better planning: A Lease expense normally remains constant for over the assets' life or
lease tenure, or grow in line with inflation. This helps in planning expense or cash outflow
as the firm does not have to arrange other financing for these assets (Gitman, 2009).
> Tax Benefit: lease expenses or lease payments are considered as operating expenses, and of
interest, is tax deductible. The firm passes a part of the tax benefit to the lease by means of
lower rental charge, as a result this favour the real cost of the asset to the lessee, work out
to be lower compared to if it were the owner of the assets( Ross, Westerfield, &Jaffe,
2010).
> Faster and cheaper credit: The acquisition of an asset under leasing arrangement is cheaper
and faster as compared to acquisition of assets through other sources of financing; as a
result a firm incur low operating costs (Weston & Bringham, 2011).
> Termination Rights: at the end of the leasing period, the lessee holds the rights to buy the
property and terminate the leasing contract, as this provide flexibility to the business
(Gitman, 2009).
> Uncertainty: The lease contract may reduce certain types of uncertai that might
otherwise decrease the value of the firm, leasing might require fewer r trictive covenants
than secured borrowing, and might encumber fewer assets than sec ed borrowing (Firer et
al., 2010).

111 I MANCOSA GSB 128115

Disadvantages of Leasing

> No ownership: At the end of leasing period the lessee doesn't end up becoming the owner
of the asset though quite a good sum of payment is being done over the years towards the
assets (Ross etal., 2010).
> Rigid terms: The lessee has to continue making the payments and leases may not be
terminated before the original term is completed. If the firm is experiencing a downturn
this might create a major financial problem for the owner who is experiencing the
downturn (Weston & Bringham, 2011).
> Reduced Return for Equity Holders: lease expenses reduce the net income without
appreciation in value, and wealth maximization for shareholders is not achieved. The
;lessee will not have equity until decides to purchase the equipment at the end of the term
and by that time the equipment might have depreciated Ross et al., 2010).
> Debt: even though debt does not appear on the balance sheet of a firm (lessee), investors
still consider long-term lease as debt and adjust their valuation a business to include
lease (Gitman, 2009). Therefore, it might be hard for the siness to tap capital markets
and raise other loans.
> Maintenance of the asset: The lessee remains re 0 insible for the maintenance and proper
operation of the asset being leased (Gitman, 2009). Lease payments are treated as expenses
rather than as equity payments towards an asset.

Both the lessee and the lesser must evaluate any prospective lease. The lessee must determine
whether leasing an asset will be less costly than buying it and the lessor must decide whether the
lease will provide a reasonable rate of return.

EI MANCOSA GSB 128115

5. CONCLUSIONS

Financial management is not an independent area, but an integral part of overall management.
Finance role is the most imperative job of all business accomplishments. As a result, the efficient
management of business enterprise is linked with the efficient management of its finances. The need
of finance starts with the setting up of business.

Some takeovers defences seem to be harmful such as poison pills. These kinds of defences are
dangerous because are not subject to shareholder vote and makes it difficult to control them. Synergy
is seldom delivered in acquisitions since is incorrectly valued, inadequately planned for and difficult
to create preparation than to figure on paper. There will alwa e demand for firms to acquire or
have use of all types of equipment and, alongside that, a d for it to d; this will therefore
create more opportunities for leasing.

I MANCOSA GSB 128115

6. BIBLIOGRAPHY

Correia, C., Flynn, D., Uliana, E. & Wormald, M., 2013. Financial Management. Cape Town : Juta.

Firer,C., Ross,S.A., Westerfield,R.W. & Jordan,B.D. 2010. Fundamentals of Corporate Finance.

Boston: McGraw Hill.

Gitman, L. J., 2009. Principles of Managerial Finance. Boston: Addison Wesley.

Ross, S. A., Westerfield, R. W. & Jaffe, J., 2010. Corporate Finance. Boston : McGraw Hill.

Ruback,R.S. 1987. Mergers and Acquisitions. University of Chicago Press. ISBN: 0-226-03209-4.
ULR: http://www.nber.org/books/auer87-1.

Schiller, B. R., 2000. The Economy Today. Los Angels: Irwin.

Toit, E. d., 2013. Corporate Financial Management In Southern Africa. Johannesburg: Intrepid
Printers.

Tomlinson, S., 2013. Economics. Causes of Unemployment, pp. 1-2.

Weston, J. F. & Bringham, E. F., 2011. Managerial Finance. London : The Dryden Press.

I MANCOSA GSB 128115