Question 12.SE.6: Larkin Conglomerates plc owns a subsidiary, Hughes Ltd, whic...

Larkin Conglomerates plc
(a) The value of an ordinary share in Hughes Ltd according to the three methods is calculated as follows:
(i) Net assets (liquidation) basis:

P_{0}=\frac{Total   assets   at   realisable   values − Total   liabilities}{No. of   ordinary   shares}

=\frac{£(326 − 166)}{60}

=\frac{£160}{60}=£2.67

(ii) Dividend yield method:

P_{0}=\frac{(Net   dividend   per   share × 100/75)}{Gross   dividend   yield}×100

=\frac{(4.0/60.0) × 100/75}{5}×100

= £1.78

(iii) Price/earnings ratio method:

P_{0}=\frac{P/E   ratio × Net   profit}{No. of   ordinary   shares}

=\frac{£16.4 × 12}{60}=£3.28

(b) Other information might include:
\bullet Details of relations with suppliers, employees, the community and other stakeholders should be ascertained.
\bullet The nature and condition of the assets owned by the target business should be examined.
The suitability of the assets and their ability to perform the tasks required will be vitally important.
\bullet Key personnel will need to be identified and their intentions with regard to the business following the takeover must be ascertained.
\bullet Onerous commitments entered into by the business (for example, capital expenditure decisions, contracts with suppliers) must be identified and evaluated.
\bullet Details of the state of the order book, the market share of the products or services provided by the business and the loyalty of its customers should be established.
\bullet Examination of the budgets which set out expected performance levels, output levels and future financing needs would be useful.
\bulletInformation concerning the cost structure of the business would be useful.