Question 12.ES.4: The directors of Simat plc have adopted a policy of expansio...
The directors of Simat plc have adopted a policy of expansion based on the acquisition of other businesses. The special projects division of Simat has been given the task of identifying suitable businesses for takeover.
Stidwell Ltd has been identified as being a suitable business and negotiations between the board of directors of each business have begun. Information relating to Stidwell Ltd is set out below:
Statement of financial position (balance sheet) as at 31 May Year 9
| £ | |
| Non-current assets (at cost less depreciation) | |
| 180,000 | Property |
| 90,000 | Plant and machinery |
| 19,000 | Motor vehicles |
| 289,000 | |
| Current assets | |
| 84,000 | Inventories |
| 49,000 | Receivables |
| 24,000 | Cash |
| 157,000 | |
| 446,000 | Total assets |
| Equity | |
| 150,000 | Ordinary £0.50 shares |
| 114,000 | Retained earnings |
| 264,000 | |
| Non-current liabilities | |
| 140,000 | 10% loan notes |
| Current liabilities | |
| 42,000 | Payables and accruals |
| 446,000 | Total equity and liabilities |
The profit for the year of Stidwell Ltd for the year ended 31 May Year 9 was £48,500 and the dividend paid for the year £18,000. Profits and dividends of the business have shown little change over the past five years.
The realisable values of the assets of Stidwell Ltd, at the end of the year, were estimated to be as follows:
| £ | |
| 285,000 | Property |
| 72,000 | Plant and machinery |
| 15,000 | Motor vehicles |
For the remaining assets, the values as per the statement of financial position were considered to reflect current realisable values.
The special projects division of Simat plc has also identified another business, Asgard plc, which is listed on the Stock Exchange and which is broadly similar to Stidwell Ltd. The following details were taken from a recent copy of a financial newspaper:
| P/E
(times) |
Yield
(gross %) |
Cover
(times) |
Dividend
(net) |
± or | Price | Stock | Years 8–9 | |
| Low | High | |||||||
| 11 | 2.76 | 4.4 | 10.33p | +4p | 500p | Asgard plc | 480p | 560p |
Assume a lower rate of tax of 10 per cent.
Required:
(a) Calculate the value of an ordinary share of Stidwell Ltd using each of the following valuation methods:
(i) Net assets (liquidation) basis
(ii) Dividend yield
(iii) Price/earnings ratio.
(b) Critically evaluate each of the valuation methods identified in (a) above.
Simat plc
(a) (i) Calculating the value per share in the consideration of Stidwell Ltd on a net assets (liquidation) basis gives:
P_{0}=\frac{Total assets at realisable values − Total liabilities}{No. of shares in issue}
=\frac{£347,000[(285 + 72 + 15 + 157) − (42 + 140)]}{300,000}
= £1.16
(ii) The dividend yield method gives:
P_{0}=\frac{Gross dividend per share}{Gross dividend yield}×100
=\frac{(18,000/300,000) × 100/90}{2.76}×100
= £2.42
(iii) The P/E ratio method gives:
P_{0}=\frac{P/E ratio × Net profit}{No. of ordinary shares in issue}
=\frac{11 × £48,500}{300,000}
= £1.78
(b) This topic is covered in the chapter. Review as necessary.