Task
Currently, the management at RR Ltd are in preliminary decisions on a horizontal acquisition of ‘Sporty PLC'. Sporty PLC has an established men's fashion brand; however, it is believed to be not maximizing the potential of a growing industry sector as evidenced by relatively low market share in an industry segment that is experiencing growth. Industry analysts believe declining sales is principally due to not anticipating current tastes/trends and the financial manager has approached you for information on what value to place on Sporty
PLC.
If the acquisition tales place, Sporty PLC will operate as a separate entity within RR Ltd. Existing designers at RR Ltd are very knowledgeable on the female market and believe they can transfer these skills to men's fashion. Also, Roy Race is an ex-professional footballer and is passionate about men's sport/casual wear. Both Rebecca and Roy are confident that synergies will improve economies of scale and scope, quality and in the medium-term, key performance ratios for Sporty PLC will be comparable to RR Ltd. RR Ltd's share price is currently £6.00, and the company's earnings per share stand at 17p. RR Ltd's weighted average cost of capital is 9%
The board estimates that annual after-synergy benefits resulting from the takeover will be £7m, that Sporty's distributable earnings will grow at an annual rate of 4% and that duplication will allow the sale of £20m of assets, net of corporate tax (currently standing at 30%), in a year's time. Information relating to Sporty PLC:
Financial Position Statement of Sporty PLC.
£m
Non-Current Assets 40
Current Assets 78
118
Equity:
Ordinary Shares (£1) 40
Reserves 3
43
Long-Term Debt 10
Current Liabilities 65
Total Liabilities 118
Statement of Profit or Loss Extracts
£m
Profit before interest and tax 8
Interest payments 2
Profit before tax 6
Taxation 1.8
Distributable Earnings 4.2
Other Information:
Current ex-dividend share price £2.00
Latest dividend payment 9p
Past four years' dividend payment 6p, 7p, 8p, 8.5p
Sporty's Equity Beta 1.15
Treasury bill yield 5%
Return of the market 12%
Required:
Given the information above, calculate the value of Sporty PLC using the following valuation methods:
a) Price / Earnings Ratio. (Using RR Ltd's P/E ratio)
b) Dividend valuation method.
c) Discounted cash flow method.