Gordon Ltd is a prosperous private company; whose owners are also the directors. The directors have...

  

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Gordon Ltd is a prosperous private company; whose owners are also the directors. The directors have decided to sell their business and have begun a search for organisations interested in its purchase. They have asked for your assessment of the price per ordinary share a purchaser might be expected to offer. Relevant information is as follows. MOST RECENT STATEMENT OF FINANCIAL POSITION $'000 Non-current assets (net book value) Land and buildings Plant and equipment Motor vehicles Patents Current assets Inventory Receivables Cash Share capital (300,000 ordinary shares of $1) Reserves Long-term liability Loan secured on property Current liabilities Payables Taxation 250 125 8 180 50 $'000 800 450 55 2 1,307 383 1,690 300 760 400 230 1,690 The profits after tax and interest but before dividends over the last five years have been as follows. Year 1 2 3 4 5 (most recent) The company's five-year plan forecasts an after-tax profit of $100,000 for the next 12 months, with an increase of 4% a year over each of the next four years. The annual dividend has been $45,000 (gross) for the last six years. As part of their preparations to sell the company, the directors of Gordon Ltd have had the non-current assets revalued by an independent expert, with the following results. $ Land and buildings Plant and equipment Motor vehicles Recent year Previous year Three years ago Average The gross dividend yields and P/E ratios of three unquoted companies in the same industry as Gordon Ltd over the last three years have been as follows. Alson Ltd Div. yield % 12 12 12 12 $ 90,000 80,000 105,000 90,000 100,000 P/E ratio 8.5 8.0 8.5 8.33 1,075,000 480,000 45,000 Ben Ltd Div. yield P/E ratio % 11.0 9.0 10.6 8.5 9.3 8.0 10.3 8.5 Cansee Ltd Div. yield P/E ratio % 13.0 12.6 12.4 12.7 10.0 9.5 9.0 9.5 Large companies in the industry apply an after-tax cost of capital of about 14% to acquisition proposals. Your assessment of the net cash flows which would accrue to a purchasing company, allowing for taxation and the capital expenditure required after the acquisition to achieve the company's target five-year plan, is as follows. Year 1 Year 2 Year 3 Year 4 Year 5 $ 120,000 120,000 140,000 70,000 120,000 Required: Use the information provided to compute the following valuations which the prospective purchasers might make. a. Asset based valuation. b. Earnings based valuation (using average earnings). (6 marks) (3 marks) (4 marks) c. Discounted value of future cash flows. d. Critically evaluate which of the above methods would offer the best estimate of the valuation of the company. (12 marks) Total - 25 marks Gordon Ltd is a prosperous private company; whose owners are also the directors. The directors have decided to sell their business and have begun a search for organisations interested in its purchase. They have asked for your assessment of the price per ordinary share a purchaser might be expected to offer. Relevant information is as follows. MOST RECENT STATEMENT OF FINANCIAL POSITION $'000 Non-current assets (net book value) Land and buildings Plant and equipment Motor vehicles Patents Current assets Inventory Receivables Cash Share capital (300,000 ordinary shares of $1) Reserves Long-term liability Loan secured on property Current liabilities Payables Taxation 250 125 8 180 50 $'000 800 450 55 2 1,307 383 1,690 300 760 400 230 1,690 The profits after tax and interest but before dividends over the last five years have been as follows. Year 1 2 3 4 5 (most recent) The company's five-year plan forecasts an after-tax profit of $100,000 for the next 12 months, with an increase of 4% a year over each of the next four years. The annual dividend has been $45,000 (gross) for the last six years. As part of their preparations to sell the company, the directors of Gordon Ltd have had the non-current assets revalued by an independent expert, with the following results. $ Land and buildings Plant and equipment Motor vehicles Recent year Previous year Three years ago Average The gross dividend yields and P/E ratios of three unquoted companies in the same industry as Gordon Ltd over the last three years have been as follows. Alson Ltd Div. yield % 12 12 12 12 $ 90,000 80,000 105,000 90,000 100,000 P/E ratio 8.5 8.0 8.5 8.33 1,075,000 480,000 45,000 Ben Ltd Div. yield P/E ratio % 11.0 9.0 10.6 8.5 9.3 8.0 10.3 8.5 Cansee Ltd Div. yield P/E ratio % 13.0 12.6 12.4 12.7 10.0 9.5 9.0 9.5 Large companies in the industry apply an after-tax cost of capital of about 14% to acquisition proposals. Your assessment of the net cash flows which would accrue to a purchasing company, allowing for taxation and the capital expenditure required after the acquisition to achieve the company's target five-year plan, is as follows. Year 1 Year 2 Year 3 Year 4 Year 5 $ 120,000 120,000 140,000 70,000 120,000 Required: Use the information provided to compute the following valuations which the prospective purchasers might make. a. Asset based valuation. b. Earnings based valuation (using average earnings). (6 marks) (3 marks) (4 marks) c. Discounted value of future cash flows. d. Critically evaluate which of the above methods would offer the best estimate of the valuation of the company. (12 marks) Total - 25 marks