Larkin Conglomerates plc owns a subsidiary company, Hughes Ltd, which sells office equipment. Recently, Larkin Conglomerates plc has been reconsidering its future strategy and has decided that Hughes Ltd should be sold off. The proposed divestment of Hughes Ltd has attracted considerable interest from other companies wishing to acquire this type of business.

The most recent accounts of Hughes Ltd are as follows:

Statement of financial position as at 31 May 20XX

£000 £000 £000 Fixed assets Freehold premises at cost 240 Less Accumulated depreciation (40) 200 Motor vans at cost 32 Less Accumulated depreciation (21) 11 Fixtures and fittings at cost 10 Less Accumulated depreciation (2) 8 219 Current assets 34 Stock at cost 22 Debtors 20 Cash at bank 76 Creditors: amounts falling due within one year Trade creditors (52)

Accrued expenses (14) (66) 10 229 Creditors: amounts falling due beyond one year 12% loan – Cirencester Bank (100)

129 Capital and reserves

£1 ordinary shares 60 General reserve 14 Retained profit 55 129 Income statement for the year ended 31 May 20XX

£000 Sales turnover 352.0 Profit before interest and taxation 34.8 Interest charges (12.0)

Profit before taxation 22.8 Corporation Tax (6.4)

Profit after taxation 16.4 Dividend proposed and paid (4.0)

12.4 Transfer to general reserve (3.0)

Retained profit for the year 9.4 The subsidiary has shown a stable level of sales and profits over the past three years. An independent valuer has estimated the current realisable values of the assets of the company as follows:

£000 Freehold premises 235 Motor vans 8 Fixtures and fittings 5 Stock 36 For the remaining assets, the values on the statement of financial position were considered to reflect their current realisable values.
Another company in the same line of business, which is listed on the Stock Exchange, has a gross dividend yield of 5 per cent and a price:earnings ratio of 12.
Assume a standard rate of income tax of 25 per cent.
Required

(a) Calculate the value of an ordinary share in Hughes Ltd using the following methods:
(i) net assets (liquidation) basis;
(ii) dividend yield;
(iii) price:earnings ratio.

(b) Briefly evaluate each of the share valuation methods used above.

(c) Identify and discuss four reasons why a company may undertake divestment of part of its business.

(d) Briefly state what other information, besides that provided above, would be useful to prospective buyers in deciding on a suitable value to place on the shares of Hughes Ltd.