(c) Explain why companies tend to follow the policy in b rather than a. (5 Marks) Question 4 Pegasus Ltd is a wholly-owned subsidiary of Sarkar plc. Although the subsidiary has per satisfactorily, Sarkar plc is considering selling its subsidiary to another conglomerate to raise finance The most recent balance sheet of Pegasus Ltd is as follows: m Statement of financial position (balance sheet) as at 30 September 20X4 m m Fixed assets Freehold land and buildings at cost 53.5 Less Accumulated depreciation 10.2 Fixtures and fittings at cost 8.6 Less Accumulated depreciation 2.9 Motor vehicles at cost Less Accumulated depreciation 43.3 50.8 Current assets Stock at cost Trade debtors Cash at bank Less Creditors: amounts falling due within one year Trade creditors Corporation tax 23.4 215 1924 31.3 611 111.9 Less Creditors: amounts falling due after one year Debentures 4910 62.9 Page 4 of 5 Capital and reserves Ordinary 0.50 shares Retained profit 25.0 37.9 629 Extracts from the profit and loss account for the year ended 30 September 20X4 are as follows: m Net profit after taxation Dividend proposed and paid 3.3 A bid of 3.50 per share for the shares in Pegasus Ltd has been received from Coric plc. Th agreed price would be paid in shares by the bidding company. The following details were taken from a financial newspaper concering the shares of Zing Ltd, a business similar to Pegasus (?) operating in the same industry that is listed on the Stock Exchange and Coric plc, the conglomerate company that has made the bid: 20X3-20X4 High Low Stock Price tor Dividend (net Cover (times) 2.5 B.O Yield (gross%) 2.2 640p 1089p 580p 530p Zing Coric 615p 1089 +5p +20 12.0p 15.0p P/E (times) 20.5 24.2 An independent valuer has recently estimated the current realisable value of the company's (Peagasus) assets as follows: m Freehold land and buildings 104.2 Fixtures and fittings 3.6 Motor vehicles 0.4 Stocks 58.0 The balance sheet values of the remaining assets were considered to reflect their net Em 1042 3.5 Freehold land and buildings Fixtures and fittings Motor vehicles Stocks 0.4 58.0 The balance sheet values of the remaining assets were considered to reflect their net realisable values. Tax on dividends is assumed to be at a rate of 10%. Required: (a) Calculate the value per share of Pegasus Ltd using the following valuation methods: () net assets (liquidation) basis, and (ii) pricelearnings ratio basis. (15 Marks) (b) Briefly evaluate the strengths and weaknesses of each of the share valuation methods set out in (a) above (5 Marks) (c) Comment on the bid that has been received from Coric plc and explain whether or not the bid should be accepted. (5 Marks) Page 5 of 5 (c) Explain why companies tend to follow the policy in b rather than a. (5 Marks) Question 4 Pegasus Ltd is a wholly-owned subsidiary of Sarkar plc. Although the subsidiary has per satisfactorily, Sarkar plc is considering selling its subsidiary to another conglomerate to raise finance The most recent balance sheet of Pegasus Ltd is as follows: m Statement of financial position (balance sheet) as at 30 September 20X4 m m Fixed assets Freehold land and buildings at cost 53.5 Less Accumulated depreciation 10.2 Fixtures and fittings at cost 8.6 Less Accumulated depreciation 2.9 Motor vehicles at cost Less Accumulated depreciation 43.3 50.8 Current assets Stock at cost Trade debtors Cash at bank Less Creditors: amounts falling due within one year Trade creditors Corporation tax 23.4 215 1924 31.3 611 111.9 Less Creditors: amounts falling due after one year Debentures 4910 62.9 Page 4 of 5 Capital and reserves Ordinary 0.50 shares Retained profit 25.0 37.9 629 Extracts from the profit and loss account for the year ended 30 September 20X4 are as follows: m Net profit after taxation Dividend proposed and paid 3.3 A bid of 3.50 per share for the shares in Pegasus Ltd has been received from Coric plc. Th agreed price would be paid in shares by the bidding company. The following details were taken from a financial newspaper concering the shares of Zing Ltd, a business similar to Pegasus (?) operating in the same industry that is listed on the Stock Exchange and Coric plc, the conglomerate company that has made the bid: 20X3-20X4 High Low Stock Price tor Dividend (net Cover (times) 2.5 B.O Yield (gross%) 2.2 640p 1089p 580p 530p Zing Coric 615p 1089 +5p +20 12.0p 15.0p P/E (times) 20.5 24.2 An independent valuer has recently estimated the current realisable value of the company's (Peagasus) assets as follows: m Freehold land and buildings 104.2 Fixtures and fittings 3.6 Motor vehicles 0.4 Stocks 58.0 The balance sheet values of the remaining assets were considered to reflect their net Em 1042 3.5 Freehold land and buildings Fixtures and fittings Motor vehicles Stocks 0.4 58.0 The balance sheet values of the remaining assets were considered to reflect their net realisable values. Tax on dividends is assumed to be at a rate of 10%. Required: (a) Calculate the value per share of Pegasus Ltd using the following valuation methods: () net assets (liquidation) basis, and (ii) pricelearnings ratio basis. (15 Marks) (b) Briefly evaluate the strengths and weaknesses of each of the share valuation methods set out in (a) above (5 Marks) (c) Comment on the bid that has been received from Coric plc and explain whether or not the bid should be accepted. (5 Marks) Page 5 of 5