Tutorial 9 - Share and Business Valuation
One of your customers, Peter Lubbock, has recently sold his business to a multi-national company and he is keen to invest the proceeds in Graig Security Systems Ltd., a recently established company which installs and monitors sophisticated surveillance systems for domestic and business use. The formation of this company involved a heavy capital investment, but the fixed assets acquired are sufficient to support a significant increase in the level of operations.
The following information is provided relating to Graig Security Systems Ltd:
Balance Sheet as at 30 June 1997
| $’000 | |
| Fixed Assets | 580 |
|
Working Capital |
20 |
| 600 | |
| Share Capital ($1 ordinary Shares) | 400 |
| 16% Loan | 200 |
| 600 |
1.
The profits of the company for the year to 30 June 1997, after deducting
loan interest, amounted to $130,000. It
is the directors’ policy to pay out 50% of
profits each year in the form of dividends, and this policy is expected
to continue for the foreseeable future.
2. The fixed assets are highly specialized. It is estimated that it would cost $760,000 to replace them, but their break-up value is put at no more than $230,000. Goodwill is estimated to be worth $200,000.
3. Peter Lubbock has been invited to acquire 120,000 ordinary shares in the company at a price of $2 per share. The proceeds would be used to repay immediately the loan and to provide much needed working capital requirements.
4. An earnings yield of 18% is considered appropriate for companies in this line of business.
5. A dividend yield of 12% is also considered appropriate.
Required:
Calculations of the value to be placed on one $1 ordinary share in Graig Security Systems Ltd., based on the information provided. The following methods should be used:
i. Break-up basis
ii. Replacement cost basis
iii.
Earnings yield basis
iv.
Dividend yield basis
A company is expected to generate future profits of $24,000 per annum. What is its value based on its earnings yield if investments of this type are expected to give an annual return of 12%. Issued share capital of 100,000 ordinary shares of $1 each.
Question
# 3- Dividend Yield Valuation
Mill Ltd. has an issued share capital of $100,000 ordinary shares of .50 cents each, the ownership of
which is concentrated in the hands of the directors, although some members of
their families hold small numbers of shares.
The company has regularly paid a total annual dividend of $25,000 and
expects to maintain this level of distribution in the future.
The average dividend yield for listed companies in the same line of business if 11.2%.
Required: Calculate the value of 250 shares in Mill Ltd. on the dividend yield basis.
The share capital of Shelf Ltd., a profitable company, is owned in equal
proportions by four brothers who are also the company’s directors.
The brothers are nearing retirement age and wish to sell the company as a
going concern. Two of the brothers
consider that the values shown in the balance sheet should be used to calculate
the price at which to offer to sell the company, while the other two feel that
the replacement cost is appropriate. The following information is available:
i. Shelf Ltd. Balance Sheet at 31 December 19x1
| $’000 | $’000 | |
| Fixed Assets | ||
| Freehold Premises | 100 | |
| Plant and Machinery at written down value | 200 | |
| 300 | ||
| Current Assets | ||
| Stock | 75 | |
|
Debtors |
50 | |
| Cash | 10 | |
| 135 | ||
| Less Current Liabilities | 65 | |
| Working Capital | 70 | |
| 370 | ||
| Less Secured Loan | 100 | |
| 270 | ||
| Financed By: | ||
| Ordinary Shares of $1 each | 100 | |
| Retained Profits | 170 | |
| 270 |
ii. The replacement costs of the assets, based on expert advice, are:
| $’000 | |
| Freehold Premises | 250 |
| Plant and Machinery | 500 |
| Stock | 80 |
Required:
Calculate the value of the business as a whole and the value of an individual share on the basis of:
Book value
Replacement cost.
Question # 5
Falkus PLC plans to diversify its activities and has under consideration the possible acquisition of a number of different private companies. One such company is Fanshawe Ltd. in respect of which the following information has been obtained:
Profit and Loss Appropriation Account for 1997
|
$ |
|
| Net Profit | 72,000 |
| Less: Dividends | 18,000 |
| Retained Profits | 54,000 |
Balance Sheet as at December 1997
| $ | |
| Freehold property at cost less Depreciation | 29,000 |
| Machinery at cost less Depreciation | 125,000 |
| Stocks | 63,000 |
| Net monetary assets | 17,000 |
| 234,000 | |
| Financed by: | |
|
Share Capital ( $ 1 ordinary shares) |
100,000 |
|
Reserves |
134,000 |
| 234,000 | |
1. The freehold property is estimated to be currently worth $150,000. The machinery and stocks might be expected to sell for $50,000 and $52,000, respectively, in a forced sale. The cost of replacing each of these assets is put at: machinery $180,000; stocks $75,000.
2. Shares in quoted companies operating in the same line of business as Fanshawe have a dividend yield of 6% and an earnings yield of 12%.
Required:
Calculations of the value to be placed on one $1 ordinary share in Fanshawe Ltd. based on the information provided above
using the following methods:
i. Break-up basis
ii. Replacement cost basis
iii. Dividend yield basis
iv. Earnings yield basis
Question # 6
Priceless PLC is a public company not quoted on the stock market. You want to know what the company is worth.
Summarized balance sheet of Priceless PLC at the end of last month
| $’000 | $’000 | |
| Fixed Assets | 3,900 | |
| Intangible asset – goodwill | 600 | |
| Current Assets | 2,000 | |
| Current Liabilities | 1,100 | 900 |
| Net Current Assets | 5,400 | |
| Capital and Reserves | ||
| Issued shares ($1 ordinary) | 3,000 | |
| Reserves | 2,000 | |
| Retained Profit | 400 | |
| 5,400 |
The fixed assets would only be expected to realize 75% of book value in the event of a forced sale, and the current assets only 50%.
Required: You are to show the value per share of Priceless PLC using the book value basis and the break-up value basis.
Question # 7
Priceless PLC generally makes annual profit of around $600,000 and pays out $250,000 in dividend to the shareholders of the three million $1 shares. Since the company is unquoted, its shares do not have a known market price. In order to get some idea of the value of the shares of the company, the directors have looked at firms of comparable size in the same industry. The two unquoted companies they have considered have dividend yield of 4.5% and 5.5% respectively.
They have also looked at similar quoted companies which have price earnings ratios of around nine.
Required: On the basis of the information given, calculate the price per share of Priceless PLC on the dividend yield basis and on the P/E ratio basis.
Question # 8
The entire share capital of Tongue Ltd., an unlisted company, is held by the directors. They have decided to sell their shares and wish to discover their likely value prior to approaching a number of prospective purchasers. Should they fail to agree a price with a buyer the company will be liquidated and the assets sold off piecemeal. The following facts and information are provided:
i) Balance Sheet of Tongue Ltd., at 31 December 19x9
| $’000 | $’000 | |
| Fixed Assets | ||
| Freehold Properties at cost |
260 |
|
| Equipment at cost less depreciation | 624 | |
| 884 | ||
| Current Assets | ||
| Stock | 279 | |
| Debtors | 193 | |
| Bank | 26 | |
| 498 | ||
| Less current liabilities | 164 | |
| Working capital | 334 | |
| 1,218 | ||
| Financed by: | ||
| Ordinary Shares ($1 each) | 600 | |
|
Reserves |
618 | |
| 1,218 |
ii) Extracts from the published profit and loss accounts for the last three years:
| 19x7 | 19x8 | 19x9 | |
| $’000 | $’000 | $’000 | |
| Depreciation | 90 | 90 | 90 |
| Directors’ remuneration | 100 | 116 | 120 |
| Net Profit before deducting dividend | 130 | 144 | 167 |
| Dividend | 90 | 90 | 90 |
It was discovered that stock was over-valued at the end of 19x6 by 24,000.
The directors have increased directors’ remuneration in order to minimize the aggregate tax liability; a realistic charge for services rendered would be $75,000 per annum. The equipment is old and in need of replacement; annual depreciation based on current replacement cost would be in the region of $120,000.
iii) One of the directors, Alfred, expresses the view that it is most important to value shares on the basis of the price/earnings ratio. For this purpose he argues that earnings should be defined as the average reported profits for the last three years, after making ‘proper’ charges for depreciation and directors’ remuneration and correcting the stock error made in 19x6.
iv) Relevant data relating to two listed companies engaged in the same line of business as Tongue Ltd:
| Dividend yield | P/E ratio | |
| Company 1 | 9% | 5.4 |
| Company 2 | 11% | 6.6 |
v) Figures obtained from experts for items appearing in the balance sheet of Tongue Ltd. at 31 December 19x9:
| Replacement values | Liquidation values | |
| $’000 | $’000 | |
| Freehold Properties | 600 | 600 |
| Equipment | 946 | 216 |
| Stock | 290 | 320 |
Liquidation costs amounted to $20,000 and goodwill is estimated to be worth $25,000.
Required:
The total value of Tongue Ltd. along with the value per share using the following bases:
a) P/E basis (with earnings computed on the basis proposed by Alfred)
b) Book value basis
c) Liquidation (break-up) basis
d) Replacement cost basis
e) Dividend yield basis
Question # 9-11 ( Taken from Chapter 9 in 'Fundamentals of Financial Management' by Brigham)
9. 9-6 parts a) to c) only
10. 9-7 parts a) and b) only (Next time do not give this question)
11. 9-8 parts a) and b) only