• Currently, the management at RR Ltd are in preliminary decisions on a horizontal acquisition of ‘Sporty PLC’. 

  Sporty PLC has an established men’s fashion brand; however, it is believed to be not maximizing the potential of a growing industry sector as evidenced by relatively low market share in an industry segment that is experiencing growth. Industry analysts believe declining sales is principally due to not anticipating current tastes/trends and the financial manager has approached you for information on what value to place on Sporty PLC.  

   

  If the acquisition tales place, Sporty PLC will operate as a separate entity within RR Ltd. Existing designers at RR Ltd are very knowledgeable on the female market and believe they can transfer these skills to men’s fashion. Also, Roy Race is an ex-professional footballer and is passionate about men’s sport/casual wear. Both Rebecca and Roy are confident that synergies will improve economies of scale and scope, quality and in the medium-term, key performance ratios for Sporty PLC will be comparable to RR Ltd. RR Ltd’s share price is currently £6.00, and the company’s earnings per share stand at 17p. RR Ltd’s weighted average cost of capital is 9% 

   

  The board estimates that annual after-synergy benefits resulting from the takeover will be £7m, that Sporty’s distributable earnings will grow at an annual rate of 4% and that duplication will allow the sale of £20m of assets, net of corporate tax (currently standing at 30%), in a year’s time. Information relating to Sporty PLC:  

   

  Financial Position Statement of Sporty PLC. 

   

                £m 

  Non-Current Assets            40 

  Current Assets              78 

                118 

  Equity: 

  Ordinary Shares (£1)            40 

  Reserves                3 

                  43 

  Long-Term Debt            10 

  Current Liabilities            65 

  Total Liabilities           118 

   

   

  Statement of Profit or Loss Extracts 

   

                £m 

  Profit before interest and tax            8 

  Interest payments               2 

  Profit before tax              6 

  Taxation                1.8 

  Distributable Earnings              4.2 

   

  Other Information: 

   

  Current ex-dividend share price       £2.00 

  Latest dividend payment        9p 

  Past four years’ dividend payment      6p, 7p, 8p, 8.5p 

  Sporty’s Equity Beta          1.15 

  Treasury bill yield          5% 

  Return of the market          12% 

• 3 

   

   

  Required: 

   

  Part A 

   

  Given the information above, calculate the value of Sporty PLC using the following valuation methods: 

   

  a)  Price / Earnings Ratio. (using RR Ltd’s P/E ratio) 

  b)  Dividend valuation method. 

  c)  Discounted cash flow method. 

             

  (15%) 

   

   

   

  Part B 

   

  Based on your calculations, justify the value of Sporty PLC and the stated motives for this acquisition.  

   

  (20%)