Chocolate Plc, a retail company, is considering a takeover bid for Butterspread Plc, a smaller company in the same industry. Chocolate Plc would be buying Butterspread Plc as a going concern.

Extracts from Butterspread Plc’s Income statement is as follows:

                                                                                      £’000

Revenue                                                                       1000

Cost of Sales                                                                  200

Gross profit                                                                     800

Operating expenses                                                         40

Profit from operations                                                     760

Finance costs                                                                   60

Profit before tax                                                              700

Taxation (30%)                                                               210

Profit after tax                                                                 468

Extracts from Butterspread Plc’s Statement of Financial Position:

Non-current assets (Note 1)                                          3000

Current assets (Note 2)                                                   600

Total assets                                                                   3600

Share capital                                                                   200

Reserves                                                                       1106

Equity                                                                            1306

Loan                                                                              1200

Current liabilities                                                           1094

Total equity and liabilities                                              3600

Note 1: The Land and buildings has not been revalued for several years and after an extensive revaluation process the current price has increased the valuation by £400,000, this is not reflected in the extract above.

Note 2: Cash contain an amount of £120,000 from a large customer which has just gone missing from the company’s vault. A contract from another customer, included in Inventory at a value of £60,000 will now have to be scrapped.

Other information:

• Selling prices are expected to remain constant.
• Sales volumes are expected to rise at 10% pa for the next 3 years and then stay constant thereafter.
• Assume that cost of sales is a completely variable cost, and that other operating expenses and finance costs are expected to stay constant.
• The discount factor of Butterspread Plc is 9%
• Dividends are growing at 6% per annum.
• The P/E ratio of Butterspread Plc is 10.
• Butterspread Plc currently has 100,000 shares in issue.

Required:

1. Produce a report to the Board of Directors of Chocolate Plc suggesting a Minimum and Maximum bid price you consider appropriate for Butterspread Plc.

2. The report should include and explain the derivation of a range of bid prices using:

• Net Asset Valuation
• P/E Ratio valuation
• Dividend Valuation Model

3. The report must also include five (5) reasons why it might be beneficial for Chocolate Plc to acquire Butterspread Plc.