An investment business is considering taking a minority stake in two businesses, Monaghan plc and Cavan plc. Both are in the same line of business and both are listed on the London Stock Exchange.

Monaghan plc has had a stable dividend policy over the years. In the financial reports for the current year, the chairman stated that a dividend of 30p a share would be paid in one year’s time and financial analysts employed by the investment business expect dividends to grow at an annual compound rate of 10 per cent for the indefinite future.

Cavan plc has had an erratic dividend pattern over the years and future dividends have been difficult to predict. However, to defend itself successfully against an unwelcome takeover, the business recently announced that dividends for the next three years were expected to be as follows:

Year Dividend per share (pence)
1 20 2 32 3 36 Financial analysts working for the investment business believe that, after Year 3, Cavan plc would enjoy a smooth pattern of growth, and dividends would be expected to grow at a compound rate of 8 per cent for the indefinite future.
The investment business believes that a return of 14 per cent is required to compensate for the risks associated with the type of business in which the two businesses are engaged. Ignore taxation.
Required:

(a) State the arguments for and against valuing a share on the basis of its future dividends.

(b) Calculate the value of a share in:
(i) Monaghan plc, and (ii) Cavan plc based on the expected future dividends of each business.

The directors of Simat plc have adopted a policy of expansion based on the acquisition of other businesses. The special projects division of Simat has been given the task of identifying suitable businesses for takeover.
Stidwell Ltd has been identified as being a suitable business and negotiations between the board of directors of each business have begun. Information relating to Stidwell Ltd is set out below:
Statement of financial position (balance sheet) as at 31 May Year 9 £
Non-current assets (at cost less depreciation)
Property 180,000 Plant and machinery 90,000 Motor vehicles 19,000 289,000 Current assets Inventories 84,000 Receivables 49,000 Cash 24,000 157,000 Total assets 446,000 Equity Ordinary £0.50 shares 150,000 Retained earnings 114,000 264,000 Non-current liabilities 10% loan notes 140,000 Current liabilities Payables and accruals 42,000 Total equity and liabilities 446,000 The profit for the year of Stidwell Ltd for the year ended 31 May Year 9 was £48,500 and the dividend paid for the year £18,000. Profits and dividends of the business have shown little change over the past five years.

285,000 Plant and machinery 72,000 Motor vehicles 15,000 For the remaining assets, the values as per the statement of financial position were considered to reflect current realisable values.
The special projects division of Simat plc has also identified another business, Asgard plc, which is listed on the Stock Exchange and which is broadly similar to Stidwell Ltd. The following details were taken from a recent copy of a financial newspaper:
Years 8–9 Stock Price ± or Dividend Cover Yield P/E High Low (net) (times) (gross %) (times)
560p 480p Asgard plc 500p +4p 10.33p 4.4 2.76 11 Assume a lower rate of tax of 10 per cent.
Required:

(a) Calculate the value of an ordinary share of Stidwell Ltd using each of the following valuation methods:
(i) Net assets (liquidation) basis (ii) Dividend yield (iii) Price/earnings ratio.

(b) Critically evaluate each of the valuation methods identified in

(a) above.