the above valuation techniques would you recommend with economic justifications to the board
of Kings PLC to pursue in this acquisition. (20 marks)
- A Drawing Relevant Academic Literature On The Mergers And Takeovers Critically Discuss The Problems Associated Wi 1 (98.36 KiB) Viewed 37 times
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Question 3 - Mergers and Takeovers The managing directors of Kings PLC are considering what value to place on Dragon PLC, a company that they are planning to take-over soon. Kings' share price is currently £4.25 and the company's nings per share stand at 31p. Kings PLC weighted av ge cost of capital is 11%. The board estimates that annual after-tax synergy benefits resulting from the takeover will be £5.36m, that Dragon's distributable earnings will grow at an annual rate of 2.5%. That duplication will allow the sale of the £32m of assets, net of corporate tax (currently standing at 22%), in a year's time. Information relating to Dragon PLC: Financial Statement of Dragon PLC Non-current assets Current assets Total assets Equity Ordinary Shares (£0.5) 105 £m 233 56
Reserves Total equity 7% bonds Current liabilities Total liabilities 120 Statement of Profit or Loss extracts £m 169 46 62.0 6.5 55.5 40.4 Profit before interest and tax Interest payments Profit before tax Taxation Distributable earnings ✔ 64 15.1 74
Other Iinancial market information: £2.45 14p 9p, 10.5p, 11p, 5.5% Current ex-div share price Latest dividend payment Past four years dividends payment 12p Dragon's equity beta Treasury bills yield Market risk rate 11% Given the above information calculate the value of Dragon PLC using the following valuation methods: a) Price/earnings ratio (10 marks) b) Discounted cash flow method (10 marks) c) Dividend valuation method (10 marks) d) Drawing relevant academic literature on the mergers and takeovers, critically discuss the problems associated with using the above valuation techniques. Based on your opinion, which of the above valuation techniques would you recommend with economic justifications to the board of Kings PLC to pursue in this acquisition. (20 marks) 1.05