Can be through obtaining a loan or issuing debentures

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Can be through obtaining a loan or issuing debentures - Raise preference share capital - Raise ordinary share capital Can utilise rights issue offer shares to existing shareholder on pro rata basis, decide if exercise Shares offered at price below the market price = rights - NB not to utilise too much debt capital - If subsequent financial performance not enough to support financial leverage = liquidity & solvency problem Mechanics of Cash Transactions - Must determine the way in which the control of the target company will be acquired - Control of the target company can be achieved by: 1.) Buying the majority of the shares directly from its shareholders for cash 2.) Buying all of the company’s assets for cash and distributing the proceeds to their shareholders - Both result in transfer of ownership, but variety of factors to consider - Implications of buying shares directly from target shareholders for cash: x Since often occurs at a premium shareholders realise a capital gain and have to pay capital gains tax x Board may view this as a hostile takeover and so engage in defense mechanisms - this may cause a protracted negotiation process x Another bidder may appear on the scene since occurs in the open market It is easier to value and buy share than it is to purchase individual assets - Implications of buying the target’s assets for cash and then distributing the proceeds to their shareholders When use this approach – pay cash to target for the assets, the cash is used to pay all liabilities and then the remaining amount is distributed to the shareholders. The acquirer can avoid some nasty surprises such as hidden liabilities not reflected by the share prices x Unfavourable tax implications for the shareholders exposed to double taxation Profit on each asset sale is taxed within the target company AND capital gains realised on shareholders investments are also taxed Profits are taxed, the remaining amount is distributed to shareholders and then taxed again 3 | P a g e Remember: k d (1 – T) < k ps < k os k d (1 – T) = after-tax cost of newly issued debt k ps = cost of newly issued preference shares k os = cost of newly issued ordinary share capital
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- Given that the cash transaction is always less profitable, why would any company agree to transaction? Utilised when the company is only interested in select assets of the company Share Transactions Motivations for Share Transactions - Shareholders of target company don’t receive a cash payment based on shareholding in the company, rather issued shares in the corporate entity that - Shareholders can choose to liquidate the shares if they want to cash instead 4 | P a g e Cash Transaction Example Mango Ltd is a small company operating in the Limpopo province. It is considering the acquisition of Peach Ltd and needs to decide whether to purchase Peach’s shares or assets. The acquisition will entail a cash purchase of R500 000. Consider the following data for Peach Ltd: Book Value Market Value Total Assets R300 000 R400 000
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  • Fall '19
  • cash transactions

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