Agricap Inc, a listed company, is considering taking over NBN Technology Ltd which is also listed...

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Agricap Inc, a listed company, is considering taking over NBN Technology Ltd which is also listed but on a different stock exchange. A due diligence has been performed on NBN Ltd's assets and liabilities and the directors are satisfied that they are correctly valued. However, they have just been advised that the asset valuation model is not a very reliable method to estimate the value of a company. Instead, it has been suggested that they can use either the free cash flow method or the dividend growth model. Previously, the NBN had a smoothed dividend policy. Additional Information relating to NBN Ltd as at 31 December, 2021 is as follows: Profit Before Interest and Tax 8% Redeemable Bonds Market Capitalisation Number of Issued Ordinary Shares The previous dividend pattern is as follows 2018 2019 2020 12p 13p 14p £125 million £50 million £630 million 280 million 2017 10p Required: 2021 15p Dividend per share Agricap has also managed to estimate that NBN Ltd's future free cash flows at the end of 2022 will be £7.2 million. At the end of 2023, the figure will grow to £8.6 million and will be £13.6 million by the end of 2024. Thereafter the cash flows will grow at a constant rate of 6% for the foreseeable future. The bonds will be redeemed in 2025 at par. Corporation Tax is estimated at 20% and the cost of equity is currently 14%. a) Calculate the value of NBN Ltd using the constant dividend growth model. (10 marks) b) Estimate the value of NBN Ltd using the free cash flow method. (10 marks) c) Discuss the strengths and weaknesses of the Asset Based Valuation method. Agricap Inc, a listed company, is considering taking over NBN Technology Ltd which is also listed but on a different stock exchange. A due diligence has been performed on NBN Ltd's assets and liabilities and the directors are satisfied that they are correctly valued. However, they have just been advised that the asset valuation model is not a very reliable method to estimate the value of a company. Instead, it has been suggested that they can use either the free cash flow method or the dividend growth model. Previously, the NBN had a smoothed dividend policy. Additional Information relating to NBN Ltd as at 31 December, 2021 is as follows: Profit Before Interest and Tax 8% Redeemable Bonds Market Capitalisation Number of Issued Ordinary Shares The previous dividend pattern is as follows 2018 2019 2020 12p 13p 14p £125 million £50 million £630 million 280 million 2017 10p Required: 2021 15p Dividend per share Agricap has also managed to estimate that NBN Ltd's future free cash flows at the end of 2022 will be £7.2 million. At the end of 2023, the figure will grow to £8.6 million and will be £13.6 million by the end of 2024. Thereafter the cash flows will grow at a constant rate of 6% for the foreseeable future. The bonds will be redeemed in 2025 at par. Corporation Tax is estimated at 20% and the cost of equity is currently 14%. a) Calculate the value of NBN Ltd using the constant dividend growth model. (10 marks) b) Estimate the value of NBN Ltd using the free cash flow method. (10 marks) c) Discuss the strengths and weaknesses of the Asset Based Valuation method.