FTX3044F 2012 Tutorial Due: Week beginning 27 February

_____________________________________________________________ _

Question 1

Glitterati Limited is a South African listed company with its core business being the mining
and distribution of diamonds. The price of diamonds has increased substantially over the
last few years and the increase has led to record earnings for Glitterati Limited. The
company has now decided to sell the backbone of its South African operations, the
Kimberley diamond mine, and rather focus on its lower cost mines in other countries and
on the buying and selling of diamonds (the world diamond market is controlled by Glitterati
Limited). The mine is owned by a wholly owned subsidiary of Glitterati Limited, Glitterati
Kimberley Diamond Mine (Pty) Limited (GKDM).

The CEO of GKDM has approached you to participate in his proposed management
buyout of GKDM. His proposal is as follows:
for 6 investors to each take up a 10% shareholding in the company for R25 million
each in cash,
for the management team to take up a 30% shareholding in the company in
exchange for their expertise and their commitment to stay with the company for the
next 5 years,
and for a Black Economic Empowerment (BEE) company to take up the remaining
10% shareholding in the company in exchange for R10 million cash and their
political expertise.

The cash raised will be used to pay Glitterati Limited for their 100% shareholding in
GKDM.

The following is an extract from the most recent financial statements of the GKDM (for the
year ended on 31 December 2009).
Rmillion
Non-current assets:
Land & buildings (note 1) 230
Equipment 240
Investment in Sand Extractors (Pty) Limited (note 2) 50

Current assets:
Inventory 40
Receivables 30
Cash and cash equivalents 10
Total assets 600

Capital and reserves:
Ordinary share capital (10 million shares) 100
Share premium 20
Distributable reserves 310

Liabilities:
Long-term loan @ fair value (note 3) 100
Current liabilities 70
Total shareholders interest and liabilities 600


Profit history: Profit after tax:
2005 R109 million
2006 R118 million
2007 (note 4) R110 million
2008 R140 million
2009 (note 5) R154 million


Notes
1.
Land & Buildings includes:
Mine Head office building
Cost R180 million R100 million
Accumulated
depreciation
R20 million R30 million
Carrying amount R160 million R70 million

The head office building has the same value for accounting and taxation purposes.
The Receiver of Revenue includes 50% of capital gains in taxable income. It is
estimated that the building can be rented out at a gross rental of R24 million per
year in arrears. Current costs related to the head office building and included in the
calculation of the net profit of the company are property taxes of R3 million per year,
water and electricity of R5 million per year and maintenance cost of R4 million for
2009. A gross rental yield of 12% p.a. is the market related rate considered fair for
similar properties.

2. The investment in Sand Extractors (Pty) Limited represents 1 500 000 shares; a
20% shareholding in the company. The company has just paid a R4.50 dividend
and as part of the proposed transaction, to sweeten the deal, Glitterati Limited
guarantees that the dividend will be R4.75 for the first year, R5.00 for the second
year, R5.50 for the third year and with 5% per year constant normal growth
thereafter. All future projections of dividends must be rounded to the nearest cent.

3. An interest expense of R4m before tax is included in the 2009 profit figures.

4. In 2007 an abnormal labour charge of R30 million before tax was charged to the
income statement.

5. Dividends of R6.75 million were received from Sand Extractors (Pty) Ltd in 2009.

Other information
1. Assume a company tax rate of 30% and a capital gains tax inclusion rate of 50%
for all years.

2. The current return that investors require from Glitterati Limited is 17% after tax.

3. Round all final answers to the nearest Rmillion.

4. The effective valuation date is 1 January 2010.


REQUIRED:

a) Would you value GKDM in one pot with a single cash flow number discounted by a
single discount rate? Why or why not? Draw a diagram of the valuation problem.
(5 marks)

b) Value the 20% stake in Sand Extractors (Pty) Limited using the Gordon Growth Model
adjusted for abnormal growth. (As the cash flows are guaranteed by Gliterati the
required rate of return will be based on Gliteratis risk profile and you should use 17%).
(5 marks)


Question 2

Platocon has just declared a dividend of 437 cps for the 2010/11 financial year.

You also have the following information:

Dividends for 2007/8, 2008/9 and 2009/10 were, respectively, 380 cps, 398 cps and
417 cps
Management has a policy of maintaining a 20% payout ratio
Platocons shares are currently trading at R208.50
Platocon has 200,000 shares in issue
The appropriate discount rate on equity is 12%

a) Determine Platocons market cap (2 marks)

b) Calulate the total present value the market is placing on Platocons growth
opportunities. (7 marks)

c) In light of your answer in (b), explain (in maximum 3 sentences) whether the market
consider Platocon to be a growth or mature company.
(2 marks)




Total: 20 marks



----0----