1. The acquisition committee of KE plc is considering making takeover bids for two competitors, Scot plc, a listed company, and Ring Ltd.

Summarised financial data is given below for these companies. Balance sheets as at 31 March 2020

	Scot		Ring
	000		000
Non-Current assets	8,600		6,400
Current assets	6,700		9,500
Total assets	15,300		15,900
Equity and liabilities
Ordinary share capital (1 shares)	5,000		2,800
Retained profits	1,300		3,700
Long-term liabilities (see note)	6,000		5,500
Trade payables	3,000		3,900
Total equity and liabilities	15,300		15,900

Note: The long-term liabilities of Scot are 11% debentures, while those of Ring are 10% bank loans.

The following information is also available concerning each of the companies:

	Scot	Ring
Operating profits in 2020	1.8m	1.6m
Predicted growth in profits after tax from 2020-2023	10%	8%
Predicted growth in profits after tax after 2023	nil	nil
P/E ratio on 31 March 2020	18.6	18.6
Estimated required return on equity	12%	13% (based on industry average)

You may assume that corporation tax is chargeable on profits before tax at a rate of 28%; there is little difference between the operating profits before tax and taxable profits. Tax is paid in the year charged.

Question Continued

1. (i) P/E ratio

2. (ii) Net assets

3. (iii) Discounted cash flows

Round the share price to the nearest penny.

Page 3

The cash flows in the next few years are as below and will remain the same from 2024:

Required:

Prepare briefing notes in order to advise the main board of KE on the following matters:

(a) The possible price that the shareholders of each company might expect (per share and in total) using each of the following methods:

Cash flow (000)	2021	2022	2023	2024
Scot	703	793	1,493	1,202
Ring	816	882	952	1,029

(b) Compare and contrast the relative advantages and disadvantages of each of the methods used above and comment on the reliability of your calculations.

(16 marks)