The managing directors of KADLexPLC are considering what value to place on Dragon PLC, a company that they are planning to take-oversoon.KADLex’s share price is currently £3.89 and the company’s earnings per share stand at 21p. KADLex’sweighted average cost of capital is 9%.The board estimates that annual after-tax synergy benefits resulting from the takeover will be £4.35m, that Dragon’sdistributable earnings will grow at an annual rate of 2.5%.That duplication will allow the sale of the £21m of assets, net of corporate tax (currently standing at 20%), in a year’s time. Information relating to Dragon PLC:Financial Statement of Dragon PLC£m£mNon-current assets270Current assets56Total assets326EquityOrdinary Shares (£1)147Reserves642117% bonds72Current liabilities43Total liabilities326
Statement of Profit or Loss extracts£mProfit before interest and tax64.0Interest payments6.5Profit before tax57.5Taxation17.1Distributable earnings40.4Other financial market information:Current ex-div share price£2.05Latest dividend payment13pPast four years dividends payment10p, 10.5p, 11p, 12pDragon’sequity beta1.1 %Treasury billsyield5%Return on the market11%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 on the mergers and takeovers literature, critically discuss the problems associated withusing the above valuation techniques.Basedon your opinion,which of the above valuationtechniqueswould you recommend with economic justifications to the board of KADLexPLC to use in this acquisition.(20 m
