Harry is about to star t negotiations to purchase a controlling interest in NX, an unquoted limited liability company. The following is the statement of financial position of NX as at 30 June 2006, the end of the company€™s most recent financial year.

The non-current assets of NX comprise:

NX has grown rapidly since its formation in 2000 by Albert Bell and Candy Dale who are currently directors of the company and who each own half of the company€™s issued share capital. The company was formed to exploit knowledge developed by Albert Bell. This knowledge is protected by a number of patents and trademarks owned by the company. Candy Dale€™s expertise was in marketing and she was largely responsible for developing the company€™s customer base. Figures for turnover and profit after tax taken from the statements of comprehensive income of the company for the past three years are:

NX€™s property has recently been valued at $3,000,000 and it is estimated that the equipment and motor vehicles could be sold for a total of $1,568,426. The net realizable values of inventory and receivables are estimated at $400,000 and $580,000 respectively. It is estimated that the costs of selling off the company€™s assets would be $101,000.

The 8% loan note is repayable at a premium of 30% on 31 December 2006 and is secured on the company€™s property. It is anticipated that it will be possible to repay the loan note by issuing a new loan note bearing interest at 11% repayable in 2012.

As directors of the company, Albert Bell and Candy Dale receive annual remuneration of $99,000 and £74,000 respectively. Both would cease their relationship with NX because they wish to set up another company together. Harry would appoint a general manager at an annual salary of $120,000 to replace Albert Bell and Candy Dale.

Investors in quoted companies similar to NX are currently earning a dividend yield of 6% and the average PE ratio for the sector is currently 11. NX has been paying a dividend of 7% on its common stock for the past two years.

Ownership of the issued common stock and preferred shares is shared equally between Albert Bell and Candy Dale.

Harry wishes to purchase a controlling interest in NX.

Required

(a) On the basis of the information given, prepare calculations of the values of a preferred share and an ordinary share in NX on each of the following bases:

(i) Net realizable values;

(ii) Future maintainable earnings.

(b) Advise Harry on other factors which he should be considering in calculating the total amount he may have to pay to acquire a controlling interest inNX.

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NX Statement of financial position as at 30 June 2006 ASSETS Non-current assets 3,369,520 Current assets Inventories, at cost 476,000 Trade and other receivables 642,970 Cash and cash equivalents 132,800 1,251,770 Total assets 4,621,290 LIABILITIES AND EQUITY Non-current liabilities 8% Loan note 260,000 260,000 Current liabilities Trade and other payables 467,700 Current tax payable . 414,700 882,400 Equity Ordinary shares, 40 cent shares 2,000,000 S1 200,000 5% Preferred shares of Retained profits 1,278,890 3,478,890 Total liabilities 1,142,400 Total liabilities and equity 4.621.290