Total liabilities r100 000 r200 000 ordinary shares

This preview shows page 4 - 6 out of 6 pages.

Total Liabilities R100 000 R200 000 Ordinary Shares R100 000 R150 000 The corporate tax rate is 28% and the personal tax rate is 25%. Based on this information, the net proceeds that the shareholders of Peach Ltd will receive from the acquisition in the case of a share purchase transaction and an asset purchase transaction can be estimated as follows: Acquisition of Shares Acquisition of Assets Acquisition Offer 500 000 500 000 - Assumed Liabilities (a) - (100 000) Total transaction value 500 000 600 000 - Basis in Assets (a) - (300 000) Accounting gain on sale of assets - 300 000 - Tax on Sale of Assets (b) - (84 000) Distribution to ordinary shareholders (c) 500 000 416 000 - Basis in Shares (a) (100 000) (100 000) Capital Gain on Share Position 400 000 316 000 - Capital Gains Tax (d) (100 000) (79 000) Net Proceeds to Peach’s Shareholders (e) 400 000 337 000 a.) SARS requires use of book values in this case b.) Utilise the corporate tax rate c.) Acquisition offer minus tax on the sale of assets d.) Shareholders personal tax rate is applicable e.) Distribution to ordinary shareholders minus capital gains tax Both the corporate and personal tax implications are expressed in the above example. When get these questions in tests IGNORE MARKET PRICES Will always be the case that the asset purchase will be less profitable than the share purchase.
Image of page 4

Subscribe to view the full document.

- Generally applied to merger situations - Often utilised by companies who: Have limited amounts of cash available Want to take advantage of tax benefits’ - Any capital gain is only taxed when the shares are sold can delay paying taxes - Preferred when stock markets are doing well can raise more capital from shares if booming market - Increased merger activity in times of prosperity due to this Determining the Exchange Ratio - Must decide if target shareholders are going to receive shares in the acquiring company or if there is a new entity that they receive shares in. - The exchange ratio determines how many new shares will be issued - When forming valuation of companies involved is very NB, any errors = erroneous transfer to shareholder - Too high – transfer of value from acquiring shareholders to target shareholders - Too conservative – transfer of value from the target shareholders to the acquiring shareholders - Aim is compare the values of the companies involved in the transaction - Incorporate any changes in control or operating and financial synergies influence stand alone value of target company - Indicates how many shares target shareholders should receive in exchange for existing shares Defense Mechanisms - Many defense mechanisms have developed to prevent the acquiring company from being successful - Can also be applied to gain a better price from the acquiring company - Important to be aware of the legal implications of these decisions - Legal aspects explained in the Company’s Act 5 | P a g e Exchange Ratio = _ Value per share of the target company _ Value per share of the acquiring company Example (page 154) Suppose that BidorDie Ltd and Smallfry Ltd decided to merge. The current market capitalisations of the two companies amount to R2 500 000 and R1 000 000 respectively. Based on an extensive due diligence
Image of page 5
Image of page 6
  • Fall '19
  • cash transactions

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes