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A ltd intends to acquire a controlling interest in B ltd , a company incorporated four years ago , by purchase of its shares .

A ltd intends to acquire a controlling interest in B ltd , a company incorporated four years ago , by purchase of its shares .The statement of financial position of B ltd as of June 30 , 2009 is as follows:
'B' Limited
Statement of Financial Position
As at June 30, 2009

Assets
Property , plant and equipment 368,480
Investments 27,000
Deferred costs 17,000

Current Assets
Stock in trade 153,410
Trade debts 90,370
Cash and bank balance 27,100

Total Assets 683,360



Share Capital and Reserves
Share capital (ordinary shares of Rs.10 each) 215,000
Reserves 173,630

Deferred Taxation 23,140

Current Liabilities
Creditors, accrued and other liabilities 251,340
Provision for taxation 20,250

Total 683,360



The historical performance of 'B' limited has been as follows
Sales Profit after Tax
Year ended June 30,2007 350,000 35,670
Year ended June 30,2008 400,652 42,150
Year ended June 30,2009 465,540 47,080

Following forecast is available from 'B' Limited's long term plan (LTP)

Projected Income Statement

2010 2011 2012 2013 2014
Sales 652,000 728,310 793,000 846,750 895,500
Less:Cost of
Sales
Direct Mat 421,500 463,500 502,700 543,900 590,400
Direct Lab 61,400 72,250 80,300 86,300 89,000
Depreciation 26,500 31,000 32,300 32,700 29,200
Repairs n Maintenace 17,750 19,750 20,300 19,500 14,250
others 20,250 22,560 26,800 18,900 16,550
Gross Profit 104,500 119,250 130,600 14,450 156,100
Less:Admin exp 48,450 54,300 62,510 68,800 73,550
Less:Sell n Dist exp 8,450 8,050 10,550 10,200 12.050
Other Income 13000 12,500 14,000 13,000 11000

Profit before tax 60,600 69,400 71,540 78,450 81,500

Additional Information:
• 'B' ltd has insured that the accuracy while preparing the projected income statement for the period 2010 to 2014 .However, management assumes zero growth rates for annual cash flows beyond 2014 being prudent.
• Since its incorporation, 'B' ltd has been following the policy of interim dividend during the year. In the year ended 2009, 'B' ltd has paid Rs. 18 million dividend to its shareholders> The company expects the growth in dividend @ 8% in the foreseeable future>
• 'B' ltd falls in the 35% tax bracket. However, the company believes that in future years' taxable income would be 85% of accounting income due to temporary differences. Taxes of a particular year are paid in the next year by the company.
• Fixed capital expenditure has been estimated at Rs. 15 million in 2010 and they are expected to increase by 10% per annum till 2014 after that it will remain stable.
• 'B' ltd has decided that investment in working capital is required to be rationalized in future, stock-in-trade at the end of each year is to be maintained equivalent to two months; sales value of that particular year. Trade debts and creditors will increase at the rate 5% per annum .
• The fair value of few non-current assets are higher than their book values as under
Book values Fair vale
Land 66,000 202,000
Plant & mach 294,860 316,940
Investments 27,000 42,000
• Required rate of return of the company is 12%

Required:
a) Work out the share valuation of 'B' ltd using the following methods :
Net assets' valuation ;
Discounted cash flow valuation;
b) What factors are usually considered while valuation of shares of an unquoted company?







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