Question 3
The board of directors of ABC Co, a listed company, is
considering making an offer to purchase DEF Co, operating in the
same industry.
ABC Co
DEF Co
End of Quarter financials End of Quarter financials summary
summary
Sm
$000
Freehold property
35
450
Plant & equipment
60
1,350
Inventory
30
350
Recievables
25
300
Cash
5
20
Less current liabilities
(35)
(550)
25
120
120
1,920
Financed by:
Ordinary shares
35
160
Reserves
45
970
Shareholders' funds
80
1.130
Medium term Bank loans
40
790
120
1,920
Both companies ordinary shares are issued in $1 nominal value.
Below is the last 5 years profit after tax and dividend figures for
both companies; last row being the most recent figures.
ABC Co
DEF Co
Profit after Tax (Sm) Dividend (Sm) Profit after Tax ($000) Dividend ($000)
14.00
9.00
143
85
15.50
9.80
162
90
17.00
10.50
151
95
18.50
12.00
175
105
20.00
12.75
183
113
The average rate of growth in DEF's dividend growth on a
compound basis is expected to continue.
The freehold property has not been revalued for several years and
is believed to have a market value of $900,000.
The balance sheet value of plant and equipment is thought to
reflect its replacement cost fairly, but its value if sold is not likely
to exceed $700,000. Approximately $60,000 of inventory is
obsolete and could only be sold as scrap for $10,000.
A suitable cost of equity for DEF Co has been estimated at 16%.
The ordinary shares of ABC Co are currently trading at 800 cents.
Questions:
(a)Estimate the value of DEF Co using the net asset method of
valuation (ie, use market values instead of book values)
(b)Estimate the value of DEF Co using the dividend valuation
model
(c)Estimate the value of DEF Co using the P/E ratio method
(please remember that ABC and DEF are in the same industry)