Total LiabilitiesR100 000R200 000Ordinary SharesR100 000R150 000The 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 SharesAcquisition of AssetsAcquisition Offer500 000500 000- Assumed Liabilities (a)-(100 000)Total transaction value500 000600 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 000416 000- Basis in Shares (a)(100 000)(100 000)Capital Gain on Share Position400 000316 000- Capital Gains Tax (d)(100 000)(79 000)Net Proceeds to Peach’s Shareholders(e)400 000337 000a.)SARS requires use of book values in this caseb.)Utilise the corporate tax ratec.)Acquisition offer minus tax on the sale of assetsd.)Shareholders personal tax rate is applicablee.)Distribution to ordinary shareholders minus capital gains taxBoth the corporate and personal tax implications are expressed in the above example.When get these questions in tests IGNORE MARKET PRICESWill always be the case that the asset purchase will be less profitable than the share purchase.
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-Generally applied to merger situations -Often utilised by companies who:Have limited amounts of cash availableWant 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 sharesDefense 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 Act5 | P a g eExchange Ratio = _ Value per share of the target company _Value per share of the acquiring companyExample (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
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