000s 000s 5,000 10,000 20,000 Investments 5,000 40,000 Current Assets 1 The directors of LayerHay Ltd., (LH) a medium sized private company have been approached by a large public listed company, which is interested in acquiring their business. The Board of Directors have indicated that they wish to receive cash for their shares, and this is acceptable to the prospective acquiring company. The directors have been asked to state a price at which they would be willing to sell. You have been recently articled at the chartered accounting firm, Levy-Gee as a trainee and you have been assigned to this corporate finance case. The partner in charge of corporate advisories has asked you to prepare a valuation report to help advise the Board of LH. You have extracted the following information from the financial statements of LH for 20X2: Balance Sheet as at 31 December 20X2 Non-Current Assets Goodwill Freehold Property Plant and Property For the year ending 31 December 20X0, the profits before interest and tax were 10 million and, in the year ending 31 December 20X1 8 million. The depreciation charge in 20X2 was 0.75 million. The owners of the preference shares have found a financial institution who will buy at a price of 0.40 per preference share. They are willing to sell at this price. You are asked to take the following into account in computing an estimate of the value per ordinary share: 1. The prospective acquirer has agreed to purchase the debentures at a price of 75 per 100 debenture stock. 2. It has been ascertained that the current rental value of the freehold property is 1.5 million per annum and that this could be sold to a financial institution based on offering an 8% return to the freeholder. 3. The investments owned by LH have a current market value of 7.5 million. 4. There is an amount of 1 million shown in the 20X2 receivables figure which is now thought to be a bad debt and hence irrecoverable. Xylon and YKK, two companies in the same business as LH, are quoted on the stock exchange. However, both are slightly larger than LH. The latest financial data on these firms is summarised below: Inventory 3,000 Receivables 6,000 Cash 1,000 10,000 Less Current Liabilities (within 1 year) Xylon YKK Par Value per share 1.00 Market price P/E EV/EBITD per share A 3.50 11.3 7 0.12 0.50 1.25 8.2 8 0.04 Net Dividend Time Yield per share Covered % 2.6 4.9 4.1 3.8 Payables 6,000 4,000 Less Long-term Liabilities (after 1 year) Loan stock 10,000 34,000 REQUIRED: Capital Ordinary share capital (1 shares) 20,000 5% preference shares 4,000 Retained Earnings 10,000 34,000 Income Statement for Year Ended 31 December 20X2 a) The directors of LH Lt. are naturally interested in obtaining the highest price possible for their shares. You are asked to determine, based on the valuation methods stated below, the highest possible asking price for the shares that can be justified given the information available. Comment on the alternative prices. i. Net Assets Value Method ii. iii. iv. P/E ratio Method Dividend Valuation Method EV/EBITDA Multiples Method (25 marks) b) Advise the directors of LH Ltd. on the lowest price they should be willing to accept. Profit before interest and tax 5,337,349 Interest 1,000,000 Profit after interest before tax 4,337,349 Taxation 737,349 Profit after tax after interest 3,600,000 Dividends Paid Preference Shares 200,000 Dividends Paid-Ordinary Shares 1,000,000 Profits retained 2,400,000 (8% marks)