Pegasus Ltd is a wholly-owned subsidiary of Sarkar plc. Although the subsidiary has performed satisfactorily, Sarkar...

  

Transcribed Image Text:

Pegasus Ltd is a wholly-owned subsidiary of Sarkar plc. Although the subsidiary has performed satisfactorily, Sarkar plc is considering selling its subsidiary to another conglomerate in order to raise finance. The most recent balance sheet of Pegasus Ltd is as follows: Statement of financial position (balance sheet) as at 30 September 20X4 £m £m Fixed assets Freehold land and buildings at cost Less Accumulated depreciation Fixtures and fittings at cost Less Accumulated depreciation Motor vehicles at cost Less Accumulated depreciation Current assets Stock at cost Trade debtors Cash at bank Less Creditors: amounts falling due within one year Trade creditors Corporation tax Less Creditors: amounts falling due after one year Debentures 47.5 23.4 21.5 25.9 5.4 53.5 10.2 8.6 2.9. 3.2 1.4 92.4 31.3 £m 43.3 5.7 1.8 50.8 61.1 111.9 49.0 62.9 Capital and reserves Ordinary £0.50 shares Retained profit Extracts from the profit and loss account for the year ended 30 September 20X4 are as follows: Net profit after taxation Dividend proposed and paid A bid of £3.50 per share for the shares in Pegasus Ltd has been received from Coric plc. The agreed price would be paid in shares by the bidding company. 20X3-20X4 High The following details were taken from a financial newspaper concerning the shares of Zing Ltd, a business similar to Pegasus (?) operating in the same industry that is listed on the Stock Exchange and Coric plc, the conglomerate company that has made the bid: Dividend (net) 640p Zing 615p +5p 12.0p 580p 1089p 530p Coric 1089p +2p 15.0p Low £m 9.3 3.3 Stock Price tor Cover (times) 25.0 37.9 62.9 2.5 3.0 Yield (gross%) 2.2 1.5 P/E (times) 20.5 24.2 An independent valuer has recently estimated the current realisable value of the company's (Peagasus) assets as follows: (Peagasus) assets as follows: Freehold land and buildings Fixtures and fittings Motor vehicles Stocks £m 104.2 3.5 0.4 58.0 PURETT POMIRS PDF The balance sheet values of the remaining assets were considered to reflect their net realisable values. Tax on dividends is assumed to be at a rate of 10%. Required: (a) Calculate the value per share of Pegasus Ltd using the following valuation methods: (i) net assets (liquidation) basis; and (ii) price/earnings ratio basis. (15 Marks) (b) Briefly evaluate the strengths and weaknesses of each of the share valuation methods set out in (a) above. (5 Marks) (c) Comment on the bid that has been received from Coric plc and explain whether or not the bid should be accepted. (5 Marks) Pegasus Ltd is a wholly-owned subsidiary of Sarkar plc. Although the subsidiary has performed satisfactorily, Sarkar plc is considering selling its subsidiary to another conglomerate in order to raise finance. The most recent balance sheet of Pegasus Ltd is as follows: Statement of financial position (balance sheet) as at 30 September 20X4 £m £m Fixed assets Freehold land and buildings at cost Less Accumulated depreciation Fixtures and fittings at cost Less Accumulated depreciation Motor vehicles at cost Less Accumulated depreciation Current assets Stock at cost Trade debtors Cash at bank Less Creditors: amounts falling due within one year Trade creditors Corporation tax Less Creditors: amounts falling due after one year Debentures 47.5 23.4 21.5 25.9 5.4 53.5 10.2 8.6 2.9. 3.2 1.4 92.4 31.3 £m 43.3 5.7 1.8 50.8 61.1 111.9 49.0 62.9 Capital and reserves Ordinary £0.50 shares Retained profit Extracts from the profit and loss account for the year ended 30 September 20X4 are as follows: Net profit after taxation Dividend proposed and paid A bid of £3.50 per share for the shares in Pegasus Ltd has been received from Coric plc. The agreed price would be paid in shares by the bidding company. 20X3-20X4 High The following details were taken from a financial newspaper concerning the shares of Zing Ltd, a business similar to Pegasus (?) operating in the same industry that is listed on the Stock Exchange and Coric plc, the conglomerate company that has made the bid: Dividend (net) 640p Zing 615p +5p 12.0p 580p 1089p 530p Coric 1089p +2p 15.0p Low £m 9.3 3.3 Stock Price tor Cover (times) 25.0 37.9 62.9 2.5 3.0 Yield (gross%) 2.2 1.5 P/E (times) 20.5 24.2 An independent valuer has recently estimated the current realisable value of the company's (Peagasus) assets as follows: (Peagasus) assets as follows: Freehold land and buildings Fixtures and fittings Motor vehicles Stocks £m 104.2 3.5 0.4 58.0 PURETT POMIRS PDF The balance sheet values of the remaining assets were considered to reflect their net realisable values. Tax on dividends is assumed to be at a rate of 10%. Required: (a) Calculate the value per share of Pegasus Ltd using the following valuation methods: (i) net assets (liquidation) basis; and (ii) price/earnings ratio basis. (15 Marks) (b) Briefly evaluate the strengths and weaknesses of each of the share valuation methods set out in (a) above. (5 Marks) (c) Comment on the bid that has been received from Coric plc and explain whether or not the bid should be accepted. (5 Marks)

Answer rating: 100% (QA)

a Net assets basis The net assets of the company are 508 million The value per share is calculated a... View the full answer