Question 12.2: CDC Ltd owns a chain of tyre- and exhaust-fitting garages. T...
CDC Ltd owns a chain of tyre- and exhaust-fitting garages. The business has been approached by ATD plc, which owns a large chain of motor service stations, with a view to a takeover of CDC Ltd. ATD plc is prepared to make an offer in cash or a share-forshare exchange. The most recent financial statements of CDC Ltd are summarised below.
| Income statement for the year ended 30 November Year 8 | |
| £m | |
| Sales revenue | \underline{18.7} |
| Profit before interest and tax | 6.4 |
| Interest | \underline{(1.6)} |
| Profit before taxation | 4.8 |
| Tax | \underline{(1.2)} |
| Profit for the year | \underline{3.6} |
| Statement of financial position as at 30 November Year 8 | |
| £m | |
| ASSETS | |
| Non-current assets (cost less depreciation) | |
| Property | 4.0 |
| Plant and machinery | \underline{5.9} |
| \underline{9.9} | |
| Current assets | |
| Inventories | 2.8 |
| Trade receivables | 0.4 |
| Bank | \underline{2.6} |
| \underline{5.8} | |
| Total assets | \underline{15.7} |
| EQUITY AND LIABILITIES | |
| Equity | |
| £1 ordinary shares | 2.0 |
| Retained earnings | \underline{3.6} |
| \underline{5.6} | |
| Non-current liabilities | |
| Loan notes | \underline{3.6} |
| Current liabilities | |
| Trade payables | 5.9 |
| Tax | \underline{0.6} |
| \underline{6.5} | |
| Total equity and liabilities | \underline{15.7} |
The accountant for CDC Ltd has estimated the future free cash flow of the business to be as follows:
| Year 9 | Year 10 | Year 11 | Year 12 | Year 13 |
| £4.4m | £4.6m | £4.9m | £5.0m | £5.4m |
After Year 13, the free cash flows are expected to remain constant at £5.4 million for the following 12 years.
The business has a cost of capital of 10 per cent.
CDC Ltd has recently had a professional valuer establish the current resale value of its assets. The current resale value of each asset group was as follows:
| £m | |
| Property | 18.2 |
| Plant and machinery | 4.2 |
| Inventories | 3.4 |
The current resale values of the remaining assets are considered to be in line with their values as shown on the statement of financial position.
A business listed on the Stock Exchange, which is in the same business as CDC Ltd, has a gross dividend yield of 5 per cent and a price/earnings ratio of 11 times.
The financial director believes that replacement costs are £1 million higher than the resale values for both property and plant and machinery, and £0.5 million higher than the resale value of the inventories. The replacement costs of the remaining assets are considered to be in line with their statement of financial position values. In addition, the financial director believes that brands held by the business, which are not shown on the statement of financial position, have a replacement value of £10 million. The values of liabilities, as shown on the statement of financial position, reflects their current values.