Green plc is a conglomerate quoted on the main London market. The latest set of accounts has
Question:
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Green plc has demonstrated an equity beta of 1.3 over the past five years (and this can be taken as an appropriate adjustment factor to the average risk premium for shares over risk-free securities). The risk-free return is currently 6.5 per cent and the risk premium for equities over risk-free securities has averaged 5 per cent per annum.
Shares in issue: 300 million (constant for the last ten years).
Required
a. Calculate a net asset value for each of Green's shares after adjusting the balance sheet for the following:
- Tangible assets are worth £50m more than shown in the balance sheet;
- One-half of the debtors figure will never be collected; and
- In your judgement Green's directors have overestimated the stock value by £30m.
b. Comment on some of the problems associated with valuing a share or a corporation using net asset value. For what type of company is net asset value particularly useful?
c. Use a dividend valuation model to calculate the value of one share in Green plc. Assume that future dividend growth will be the same as the average rate for recent years.
d. Calculate the weighted average cost of capital (WACC) for Green plc on the assumptions that the share price calculated in question c is the market share price and the entry 'Creditors (amounts falling due after more than one year)' consists entirely of a debenture issued at a total par value of £100m five years ago and this is the only liability relevant to the WACC calculation. The debenture will pay a coupon of 8 per cent in one year, followed by a similar coupon in two years from now. A final coupon will be paid in three years upon redemption of the debenture at par value. The debenture is currently trading in the secondary market at £103 per £100 nominal.
For the purpose of calculating the weighted average cost of capital the tax rate may be assumed to be 30 per cent.
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Step by Step Answer:
a m Balance sheet NAV 210 Tangible assets 50 Debtors 60 Stock 30 170 170m300m 567 pence b ...View the full answer
