Busy plc, an all-equity-financed firm, has three strategic business units. The polythene division has capital of £8m and is expected to produce returns of 11 per cent for the next five years. Thereafter it will produce returns equal to the required rate of return for this risk level of 14 per cent. The paper division has an investment level of £12m and a planning horizon of 10 years. During the planning horizon it will produce a return of 22 per cent compared with a risk-adjusted required rate of return of 15 per cent. The cotton division uses £2m of capital, has a planning horizon of seven years and a required rate of return of 16 per cent compared with the anticipated actual rate of 17 per cent over the first seven years.

a Calculate the value of the firm.

b Draw a value-creation and strategic business unit performance spread chart.

c Develop five ideas for increasing the value of the firm. State your assumptions.