The most recent statement of financial position for Vadeema plc is given below. Vadeema is a stock market-quoted company that specialises in researching and developing new pharmaceutical compounds. It either sells or licenses its discoveries to larger companies, although it operates a small manufacturing capability of its own, accounting for about half of its turnover:

Statement of financial position as at 30 June 2014

Further information:
1 In 2013-14, Vadeema made sales of £300 million, with a 25 per cent net operating margin (i.e. after depreciation but before tax and interest).
2 The rate of corporate tax is 33 per cent.
3 Vadeema's sales are quite volatile, having ranged between £150 million and £350 million over the previous five years.
4 The tangible fixed assets have recently been revalued (by the directors) at £65 million.
5 The intangible assets include a major patent (responsible for 20 per cent of its sales) which is due to expire in April 2015. Its book value is £20 million.
6 50 per cent of stocks and work-in-progress represents development work for which no firm contract has been signed (potential customers have paid for options to purchase the technology developed).
7 The average P:E ratio for quoted drug research companies at present is 22:1 and for pharmaceutical manufacturers is 14:1. However, Vadeema's own P:E ratio is 20:1.
8 Vadeema depreciates tangible fixed assets at the rate of £5 million p.a. and intangibles at the rate of £25 million p.a.
9 The interest charge on the overdraft was 12 per cent.
10 Annual fixed investment is £5 million, none of which qualifies for capital allowances.
Required
(a) Determine the value of Vadeema using each of the following methods:
(i) Net asset value
(ii) Price: earnings ratio
(iii) Discounted cash flow (using a discount rate of 20 per cent).
(b) How can you reconcile any discrepancies in your valuations?
(c) To what extent is it possible for the Stock Market to arrive at a 'correct' valuation of a company like Vadeema?

Transcribed Image Text:

Assets employed Fixed (non-current) assets Tangible Intangible Current assets Stock and work-in-progress Debtors Bank Current liabilities Trade creditors Bank overdraft Net current assets 10% loan stock Em Em 120 1A) 80 20 105 (10) 20) 0 75 (40) 205 Net assets Financed by Ordinary shares capital (25p par value) Share premium account Revenue reserves 100 Shareholders' funds 205