Description

Question 1

Tyson PLC. has distributable earnings of £145m, a weighted average cost of capital of 9% and a P/E ratio of 20.4 times. It is in the process of taking over Bruno PLC whose financial details are as follows:

Bruno PLC : Key financial data

Profit before interest and tax                                            £89.00m

Interest paid                                                                         £14.20m

Corporate tax                                                                       £22.44m

Distributable earnings                                                         £52.36m

Current dividend                                                                 15p

Last 4 years’ dividends                                                        10.7p, 11.5p, 13.1p, 14.2p

Earnings per share (EPS)                                                     14.7p

Price / Earnings ratio                                                           17.55 times

Market price of ordinary shares                                       £2.58

Equity Beta                                                                            1.42

Replacement cost of non-current assets                         £420m

Disposal value of non-current assets                               £368m

Bruno PLC financial position statement

 

£m                          £m

Non-current assets                                                                              385

Current assets                                                                                        82

Total assets                                                                                            467

 

Equity Finance:

Ordinary shares (nominal value 50p)                                               178

Reserves                                                                                                  27

205

Long-term liabilities:

6% bonds (redemption after 12 years)                                            188

Current liabilities                                                                                74

Total liabilities                                                                                       467

 

Tyson PLC expects to maintain an annual increase in distributable earnings of 4% due to anticipated synergy as a result of the takeover. The company will also be able to sell surplus non-current assets for £85m in three years’ time. The current estimates of cash flows of Bruno PLC.is £46m, but these are expected to grow at an annual rate of 5% in future years. The risk-free rate of return is 3.5% and the equity risk premium is 7%. Companies in the same sector as Bruno PLC have an average price / earnings ratio of 18.2 times and a weighted average cost of capital of 10%.

Required:

Calculate the value of Bruno PLC using the following valuation methods:

1. Price Earnings Ratio Valuation.
2. Dividend Growth Valuation.
3. DCF Valuation (Using Tyson’s WACC)
4. Using available resources (book, internet) calculate the following ratios:

• Stock market valuation
• Net Asset Value (use book value figures)
• Net Realisable Value (use book value figures)
• Net Replacement Value (use book value figures)
• Earnings Yield (Excluding and Including Growth)

Solution

1. Price-Earnings Ratio Valuation

Value of Bruno PLC using target firm P/E ratio  = £52.36m x 17.55  = £918.92m

Value of Bruno PLC using acquirer (Tyson’s) P/E ratio  = £52.36m x 20.4  = £1,068.14m

Value of Bruno PLC using a weighted average  = (17.55 x 52.36) + (20.4 x 145)  = 19.64 times

  (145 + 52.36)

Therefore value of Bruno PLC  = £52.36m x 19.64  £1,028.35m

 

To receive the entire sample, please click the download icon herebelow: