Questions:

1. Assume that you are the Chief Financial Officer of Steinhoff International Holdings LTD. Discuss
some specific investment and financing decisions which you may be required to make.
[30 marks]

2. Market efficiency is important for the investment manager. Discussing Fama`s -Efficient Market Hypothesis and assess the Efficiency of the Johannesburg Stock Exchange. [25 marks]

3. Gijima Holdings Pty LTD signed a four-year tender extension with the Department of Labour in February 2014. The Department of Labour is required to pay Gijima R 15.6 million per year, for
the provision and maintenance of IT equipment, until June 2019 which amounts to R 300 000
per week. However, this amount is taxable. Assume a South Africa tax rate of 45%. The effective
date of the new tender extension begins on 1 July 2015. The current tender, which is for R
250 000 per week, comes to an end on 30 June 2015. In addition to this tender Gijima has other
contracts with private companies which earns it R 1.8 million per year. Gijima is struggling to
compete with EOH and Bidvest Technologies in the private sector. Bidvest Technologies is
expected to R 15 million from private contracts. Bidvest also has offshore earnings which
because of their negligibility and fluctuations of the Rand we have decided to ignore. Bidvest
Technologies has a separate Data division with earnings expected to increase to R 17 million for
the year ending 30 June 2016 and are expected to grow by 7% per year after 2016 Until 2019.
Bidvest Technologies government contracts after-tax earnings until 30 June 2015 are R 15
million per year. Gijima expects earnings its earnings from its chip distribution business to grow
by 7% annually from 2014. Bidvest Technologies has extended its current government tenders
for another 3 years until 2018. We assume Bidvest will be able to extend its government tenders under the terms yielding the same after-tax earnings until 2019. The new government tenders extension earnings Bidvest Technologies R 17.6 million per year, cementing its status as the number performer in the technology industry. Bidvest Technologies, split its Data Division
earnings, 60-40 with local contractors as part of its BBBEE strategy. With the increased
complexity of the projects and brand awareness, it expects to leverage this to earn more from
government tenders. Bidvest`s government tender earnings are after tax. The earnings for
Bidvest Technologies Data division accrue a tax rate of 52%. The applicable interest rate is 5%
per year. The assumption is that all payments in favour of the company occur at the end of the
year. Assume that the current date is 1 July 2014.

Required:
What is the present value of Gijima Holdings LTD`s after-tax earnings as of 1 July 2014? What is the present value of Bidvest Technologies LTD after-tax earnings on the same date? How do the two companies compare?

Answers:

Introduction

Steinhoff International Holdings is a holding company which has investments in retail industry in over 30 countries and is listed in Germany as well as South Africa. Considering the reliance of the company on asset management, the role of Chief Financial Officer is quite significant (Steinhoff, 2017).

Discussion

There is a range of investment and financing decision that the CFO would need to make as discussed below.

Considering that the company invests money in various retail businesses across the globe, hence the CFO would be continuously engaged in vetting new proposals for investment. In this regards, the various capital budgeting techniques would be involved in analyzing various potential investments considering the long term nature of these capital investments. Considering that economic factors domestically and internationally play a crucial role in retail consumer spending, hence such factors would need to be considered in a futuristic manner (Damodaran, 2015).

Besides, the CFO would also be concerned with the current investments that the company has made where decision to exit or enhance stake may have to be taken. Also, there would be periodic review of such investments particularly in wake of economic, social and technological developments. It is also possible that the CFO needs to provide strategic assistance especially for those investments where the company has a significant stake (Parrino and Kidwell, 2014).

Considering that the company is a holding company with significant assets, hence financing would be a crucial aspect of CFO’s responsibilities as incremental financing is required to make new investments. Also, taking into regards the global reach of the company, decision needs to be made by the CFO for tapping the cheapest sources of financing. Additionally, refinancing of debt may be required on a periodic basis. Further, a healthy mix of debt and equity must be undertaken considering the performance of the portfolio investments. These are vital decisions where the role of the CFO is quite critical (Brealey, Myers and Allen, 2014).

Conclusion

From the above discussion, it is fair to conclude that CFO plays a critical role in selection of new investments and managing current investments by the company. Also, the financing needs of the company are catered to by the CFO along with taking capital structure related decisions.

Question 2

Introduction

From the perspective of an investment manager, the presence of efficiency in market is of critical importance. The objective is to highlight the concept of market efficiency as presented by Eugene Fama. Further, in light of this concept, the efficiency of Johannesburg Stock Exchange needs to be analyzed.

Discussion

Concept of Efficient Market Hypothesis

According to Efficient Market Hypothesis, the market tends to reflect the true prices of the various financial assets. There are three forms of market efficiency namely weak, semi-strong and strong. As per the weak form of market efficiency, prices tend to follow a random pattern and hence future prices of stocks or assets cannot be predicted from their past prices. Thus, this form of efficiency highlights the futility of technical analysis though it advocates that fundamental analysis may be useful to some extent (Damodaran, 2015).

As per the semi-strong form of market efficiency, the price of the stock tends to quickly adjust to any new information available in the public domain. This adjustment is so swift that it does not provide opportunity to market participants to earn an excess return. Therefore, by indicating that stocks tend to trade at their intrinsic value, this efficiency renders fundamental analysis useless since the stocks are fairly valued and any deviations from the fair price are quickly corrected.  As per the strong form of market efficiency, the share prices at a given time tend to capture all the public and private information and thereby no market participant can earn excess returns(Brealey, Myers and Allen, 2014).

It is imperative to note that the above theory is based on a number of assumptions such as rational investors having common objectives, no transaction costs and tax, no information asymmetry. Most of these assumptions are not true in real life and hence most financial markets display weak or semi-strong form of efficiency only (Parrino and Kidwell, 2014).

Efficiency of Johannesburg Stock Exchange

A host of empirical studies have been conducted in relation to testing the efficiency of Johannesburg Stock Exchange (Bonga-Bonga-2012).  According to most empirical studies, the JSE tends to exhibit weak form of market efficiency. The study by Fusthane and Kapingura (2017) highlight that though steps have been taken to enhance the market efficiency of JSE, but more steps need to be taken in this regards. Also, studies have indicated that market efficiency was lower during crisis such as financial crisis in 2008 when human emotions tend to drive the investment decisions. Other studies on JSE have indicated that weak form of efficiency is observed for large cap stocks but the same cannot be said about the small cap and mid cap stocks where market participants are able to beat the market (Bonga-Bonga-2012).

Conclusion

Based on the above discussion, it is apparent that market efficiency hypothesis highlights three different forms of efficiency which are based on certain assumptions which are quite often false in the real world. The empirical evidence suggests that JSE at best shows weak form of efficiency only which may not extend to all indices.

Question 3

Introduction

The objective is to determine the present value of after tax earnings of two companies namely Gijima Holdings LTD and Bidvest Technologies LTD as on July 1, 2014 taking into consideration the information provided in the given case.

Discussion

The present value would be found by discounting all the future after tax earnings using the given discount rate of 5% considering that all after tax earnings are derived at the end of the given year when it is supposed to be derived. A year has been defined from July 1 to June 30.

Gijima Holdings LTD

Expected earnings from Department of Labour from July 1, 2014 to June 30, 2015 (Year 1) = 15.6 million *(250000/300000) = R 13 million

Expected earnings from Department of Labour from July 1, 2015 to June 30, 2016 (Year 2) = R 15.6 million

Expected earnings from Department of Labour from July 1, 2016 to June 30, 2017 (Year 3) = R 15.6 million

Expected earnings from Department of Labour from July 1, 2017 to June 30, 2018 (Year 4) = R 15.6 million

Expected earnings from Department of Labour from July 1, 2018 to June 30, 2019 (Year 5) = R 15.6 million

Expected earnings from chip division from July 1 2014 to June 30, 2015 (Year 1) = R 1.8 million *1.07 = R1.93 million

Expected earnings from chip division from July 1 2015 to June 30, 2016 (Year 2) = R 1.8 million *1.07² =R 2.06 million

Expected earnings from chip division from July 1 2016 to June 30, 2017 (Year 3) = R 1.8 million *1.07³ = R 2.21 million

Expected earnings from chip division from July 1 2017 to June 30, 2018 (Year 4) = R 1.8 million *1.07⁴ = R 2.36 million

Expected earnings from chip division from July 1 2018 to June 30, 2019 (Year 5) = R 1.8 million *1.07⁵ = R 2.52 million

The present value of the above highlighted after tax earnings can be indicated as follows.

Bidvest Technologies LTD

After-tax earnings from government contracts from July 1, 2014 to June 30, 2015 (Year 1) = R 15 million

After-tax earnings from government contracts from July 1, 2015 to June 30, 2016 (Year 2) = R 17.6 million

After-tax earnings from government contracts from July 1, 2016 to June 30, 2017 (Year 3) = R 17.6 million

After-tax earnings from government contracts from July 1, 2017 to June 30, 2018 (Year 4) = R 17.6 million

After-tax earnings from government contracts from July 1, 2018 to June 30, 2019 (Year 5) = R 17.6 million

After – tax earnings for the company from the data division from July 1, 2014 to June 30, 2015 (Year 1) = R 15 million *0.6*(1-0.52) = R 4.32 million

After – tax earnings for the company from the data division from July 1, 2015 to June 30, 2016 (Year 2) = R 17 million *0.6*(1-0.52) = R 4.896 million

After – tax earnings for the company from the data division from July 1, 2016 to June 30, 2017 (Year 3) = R 17 million *0.6*(1-0.52)*1.07 = R 5.238 million

After – tax earnings for the company from the data division from July 1, 2017 to June 30, 2018 (Year 4) = R 17 million *0.6*(1-0.52)*1.07² = R 5.605 million

After – tax earnings for the company from the data division from July 1, 2018 to June 30, 2019(Year 5) = R 15 million *0.6*(1-0.52)*1.07³ = R 6 million

The present value of the above highlighted after tax earnings can be indicated as follows.

Conclusion

From the above computation, it may be concluded that the present value of post-tax earnings of Gijima Holdings is R 41 million while that of Bidvest Technologies is R 96.1 million.

References

Bonga-Bonga L. (2012), “The evolving efficiency of the South African stock exchange”, International Business and Economics Research Journal, 11(9), 997-1002

Brealey, R. A., Myers, S. C., & Allen, F. (2014) Principles of corporate finance, 2nd ed. New York: McGraw-Hill Inc.

Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York: Wiley, John & Sons.

FUSTHANE, Olwetu; M, Kapingura F. (2017) Weak Form Market Efficiency of the Johannesburg Stock Exchange: Pre, During and Post the 2008 Global Financial Crisis. Journal of Economics and Behavioral Studies v. 9, n. 5, p. 29-42

Parrino, R. and Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London: Wiley Publications

Steinhoff (2017) About Steinhoff, [Online] Available at http://www.steinhoffinternational.com/who-we-are-and-what-we-do.php [Accessed August 12, 2018]