The senior management of Galbraith Ltd is negotiating a management buyout of the business from the existing shareholders. The most recent financial statements of Galbraith Ltd are as follows:

The following additional information is available:
1 Dividends of £5,000 were proposed and paid during the year.
2 A professional surveyor has recently established the current realisable value of the business’s assets as being:

The current realisable value of trade receivables was considered to be the same as their statement of financial position (balance sheet) values.
3 The free cash flows of the business over the next ten years are estimated as follows:

4 The cost of capital for the business is 10 per cent.
5 A similar business which is listed on the Stock Exchange has a price/earnings ratio of 8 and a dividend yield of 2.2 per cent.
Required:

(a) Calculate the value of a share in Galbraith Ltd using the following valuation methods:
(i) net assets (liquidation) basis (ii) price/earnings basis (iii) dividend yield basis (iv) free cash flow basis (assuming a ten-year life for the business).

(b) Briefly evaluate each of the share valuation methods set out in (a).

(c) Which share valuation method, if any, do you consider most appropriate as a basis for negotiation and why?

(d) What potential problems will a management buyout proposal pose for the shareholders of Galbraith Ltd?

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Statement of financial position as at 30 November Year 6 ASSETS Non-current assets (cost less depreciation) Property Plant and machinery Motor vehicles Current assets Inventories Trade receivables Total assets EQUITY AND LIABILITIES Equity 0.50 ordinary shares General reserve Retained earnings 292,000 145,000 42,000 479,000 128,000 146,000 274,000 753,000 100,000 85,000 169,000