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The acquisition committee of KE plc is considering making takeover bids for two competitors, Scot plc, a listed company, and Ring Ltd. Summarised financial data

The acquisition committee of KE plc is considering making takeover bids for two competitors, Scot plc, a listed company, and Ring Ltd.

Summarised financial data is given below for these companies. Balance sheets as at 31 March 2020

 

Scot

 

Ring

 

£’000

 

£’000

Non-Current assets

8,600

 

6,400

Current assets

6,700

 

9,500

Total assets

15,300

 

15,900

Equity and liabilities

   

Ordinary share capital (£1 shares)

5,000

 

2,800

Retained profits

1,300

 

3,700

Long-term liabilities (see note)

6,000

 

5,500

Trade payables

3,000

   

3,900

Total equity and liabilities

15,300

 

15,900

The long-term liabilities of Scot are 11% debentures, while those of Ring are 10% bank loans.

The following information is also available concerning each of the companies:

 

Scot

Ring

Operating profits in 2020

£1.8m

£1.6m

Predicted growth in profits after tax from 2020-2023

10%

8%

Predicted growth in profits after tax after 2023

nil

nil

P/E ratio on 31 March 2020

18.6

18.6

Estimated required return on equity

12%

13% (based on industry average)

You may assume that corporation tax is chargeable on profits before tax at a rate of 28%; there is little difference between the operating profits before tax and taxable profits. Tax is paid in the year charged.

Question Continued

  1. (i)  P/E ratio

  2. (ii)  Net assets

  3. (iii)  Discounted cash flows

Round the share price to the nearest penny.


The cash flows in the next few years are as below and will remain the same from 2024:

Required:

Prepare briefing notes in order to advise the main board of KE on the following matters:

(a) The possible price that the shareholders of each company might expect (per share and in total) using each of the following methods:

Cash flow (£000)

2021

 

2022

2023

 

2024

Scot

703

 

793

1,493

 

1,202

Ring

816

 

882

 

952

 

1,029

 

(b) Compare and contrast the relative advantages and disadvantages of each of the methods used above and comment on the reliability of your calculations.

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