Restwell plc, a hotel and leisure company, is planning to take over a smaller private limited company,

Question:

Restwell plc, a hotel and leisure company, is planning to take over a smaller private limited company, Staygood Ltd, and needs to place a value on the company. Restwell has gathered the following data:
Restwell
Weighted average cost of capital................................................12%
Price/earnings ratio..................................................................12
Shareholders' payment........................................................27p
Past five years' payments.....................15p, 17p, 18p, 21p, 23p
Current EPS........................................................................37p
Number of ordinary shares in issue.............................................5m
It is estimated that the of Staygood is 20 per cent higher (in relative terms) than the of Restwell, owing to the higher risk of Staygood's operations.
Restwell estimates that cash flows at the end of the first year will be £2.5m and these will grow at an annual rate of 5 per cent. Restwell also expects to raise £5m in two years' time by selling off hotels of Staygood that are surplus to its needs.
Given the earlier information, estimate values for Staygood using the following valuation methods:
(a) Price/earnings ratio valuation;
(b) growth model;
(c) valuation.
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