Required:

1. Estimate the value of Jill plc to its existing shareholders?
2. Estimate the maximum price that Jack plc should pay to acquire Jill plc assuming the earning continues to grow at the historical rate and the required return remains at 5%? 

Transcribed Image Text:

Jack plc is considering an acquisition of Jill plc If Jill plc remains an independent company, the earnings growth is expected to stay at the historical average rate to infinity. The rate of return required on a business of this risk class is 5% per annum. The management of Jack plc believes that there will be no loss of sales if the two companies merge. They also believe that if they acquire Jill plc they will be able to make cost saving of £250,000 per annum, which will remain constant in future years. In addition, a warehouse can be closed immediately and sold for £350,000 with no adverse impact on trading. The trading history of Jill plc is as follows, Earning £m 5.0 4.8 4.7 4.5 4.2 4.0 Year Current 1 year ago 2 years ago 3 years ago 4 years ago 5 years ago Jack plc is considering an acquisition of Jill plc If Jill plc remains an independent company, the earnings growth is expected to stay at the historical average rate to infinity. The rate of return required on a business of this risk class is 5% per annum. The management of Jack plc believes that there will be no loss of sales if the two companies merge. They also believe that if they acquire Jill plc they will be able to make cost saving of £250,000 per annum, which will remain constant in future years. In addition, a warehouse can be closed immediately and sold for £350,000 with no adverse impact on trading. The trading history of Jill plc is as follows, Earning £m 5.0 4.8 4.7 4.5 4.2 4.0 Year Current 1 year ago 2 years ago 3 years ago 4 years ago 5 years ago

Answer rating: 100% (QA)

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