The acquisition committee of KE plc is considering making takeover bids for two competitors, Scot plc, a listed company, and Ring Ltd.
Summarised financial data is given below for these companies. Balance sheets as at 31 March 2020
|
Scot |
Ring |
||
|
£’000 |
£’000 |
||
|
Non-Current assets |
8,600 |
6,400 |
|
|
Current assets |
6,700 |
9,500 |
|
|
Total assets |
15,300 |
15,900 |
|
|
Equity and liabilities |
|||
|
Ordinary share capital (£1 shares) |
5,000 |
2,800 |
|
|
Retained profits |
1,300 |
3,700 |
|
|
Long-term liabilities (see note) |
6,000 |
5,500 |
|
|
Trade payables |
3,000 |
3,900 |
|
|
Total equity and liabilities |
15,300 |
15,900 |
The long-term liabilities of Scot are 11% debentures, while those of Ring are 10% bank loans.
The following information is also available concerning each of the companies:
|
Scot |
Ring |
|
|
Operating profits in 2020 |
£1.8m |
£1.6m |
|
Predicted growth in profits after tax from 2020-2023 |
10% |
8% |
|
Predicted growth in profits after tax after 2023 |
nil |
nil |
|
P/E ratio on 31 March 2020 |
18.6 |
18.6 |
|
Estimated required return on equity |
12% |
13% (based on industry average) |
You may assume that corporation tax is chargeable on profits before tax at a rate of 28%; there is little difference between the operating profits before tax and taxable profits. Tax is paid in the year charged.
Question Continued
-
(i) P/E ratio
-
(ii) Net assets
-
(iii) Discounted cash flows
Round the share price to the nearest penny.
The cash flows in the next few years are as below and will remain the same from 2024:
Required:
Prepare briefing notes in order to advise the main board of KE on the following matters:
(a) The possible price that the shareholders of each company might expect (per share and in total) using each of the following methods:
|
Cash flow (£000) |
2021 |
2022 |
2023 |
2024 |
|
Scot |
703 |
793 |
1,493 |
1,202 |
|
Ring |
816 |
882
|
952 |
1,029
|
(b) Compare and contrast the relative advantages and disadvantages of each of the methods used above and comment on the reliability of your calculations.
