The board of Hanging Valley plc wishes to take over Rattling Creek Ltd. Shown below are summarised financial data for the two companies:

Hanging Valley’s earnings and dividends have been increasing at approximately 15 per cent per year in recent times, while over the same period the earnings and dividends of Rattling Creek have remained static. The current market price of Hanging Valley’s ordinary shares is £1.60. The board of Hanging Valley considers that the shareholders of Rattling Creek will accept a share-for-share offer in the proportion of four shares in Hanging Valley for every five shares in Rattling Creek.

(a) Using three different valuation methods, determine the effect on the wealth of Hanging Valley plc’s shareholders if Rattling Creek Ltd’s shareholders accept the proposed share exchange.

(b) Critically discuss the economic reasons why one company may seek to take over another.

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Profit before interest and tax Hanging Valley 420 000 Ordinary share dividends 6.9p Corporate tax rate 35% Rattling Creek 200 000 14.0p 35% Financial position statement extracts: Hanging Valley Rattling Creek Net non-current assets 1750 000 800 000 Current assets 800 000 Current liabilities (450 000) Total assets less current liabilities 2100 000 Long term liabilities Long term debt at 10% per year 2 100 000 500 000 (200 000) 1 100 000 (200 000) 900 000 Financed by: Ordinary shares, 1 Reserves 1 500 000 500 000 600 000 400 000 2100 000 900 000