(a) The directors of Oscar plc are trying to estimate its value under its current strategy using a Shareholder Value Analysis framework. The last reported annual sales of Oscar plc were £30 million.

The key value drivers are estimated as follows:

Sales growth rate Operating profit margin (before tax)

Corporation Tax Fixed capital investment Working capital investment Planning period Weighted average cost of capital 7%

10%

30%

15% of sales growth 9% of sales growth 6 years 13%

Depreciation is currently charged on a reducing balance basis. The most recent charge was £0.5m. This is expected to remain constant over the next few years. All depreciation is tax-allowable.

The dividend payout ratio is 20 per cent.

Assume marketable securities held are £2.5m, and debt (in the form of a bank loan) is £6m (interest payable is at the rate of 8.33 per cent p.a.).

Required Calculate the overall company (or enterprise) value, and the shareholder value.

(Clearly state any assumptions that you make.)

(b) The market value of Oscar’s equity is £25m (lower than the directors’ estimate of value), and also below the book value of net assets of £50m.

Several directors argue that Oscar is undervalued by the stock market, and are wondering how to improve the firm’s stock market rating.

Required Suggest possible reasons for this apparent undervaluation, and evaluate suitable financial policies that Oscar’s directors might adopt to enhance its value.