2 The Board of Directors of Rundum plc are contemplating a takeover bid for Carbo Ltd, an unquoted company which operates in both the packaging and building materials industries. If the offer is successful, there are no plans for a radical restructuring or divestment of Carbo’s assets.

Carbo’s Balance Sheet for the year ending 31 December 2005 shows the following:

Further information:

(a) Carbo’s pre-tax earnings for the year ended 31 December 2005 were £2.0 million.

(b) Corporation Tax is payable at 33 per cent.

(c) Depreciation provisions were £0.5 million. This was exactly equal to the funding required to replace worn-out equipment.

(d) Carbo has recently tried to grow sales by extending more generous trade credit terms. As a result, about a third of its debtors have only a 50 per cent likelihood of paying.

(e) About half of Carbo’s stocks are probably obsolete with a resale value as scrap of only £50,000.

(f) Carbo’s assets were last revalued in 1994.
(g) If the bid succeeds, Rundum will pay off the presently highly overpaid Managing Director of Carbo for £200,000 and replace him with one of its own ‘high-flyers’. This will generate pre-tax annual savings of £60,000 p.a.
(h) Carbo’s two divisions are roughly equal in size. The industry P:E ratio is 8:1 for packaging and 12:1 for building materials.
Required

(a) Value Carbo using a net asset valuation approach.

(b) Value Carbo using a price:earnings ratio approach.

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Assets employed Freehold property Plant and equipment Current assets: stocks debtors cash Total assets Creditors payable within one year Total assets less current liabilities Net assets Creditors payable after one year Financed by Ordinary share capital (25p par value) Revaluation reserve Profit and loss account Shareholders' funds m m 4.0 2.0 1.5 3.0 0.1 4.6 10.6 (3.0) 7.6 (1.0) 6.6 2.5 0.5 3.6 6.6