Falcon Ltd. is a private company in the UK. Its balance sheet on 31 December 2011 shows the following information:

£’000
Share capital @ £1 par value	10,000
Share premium	5,000
Revaluation reserve	2,500
Retained profits	12,500
Shareholders’ funds	30,000
5% bonds, matured in 2019	20,000
Capital employed	50,000

Falcon paid the following dividends in the last 5 years:

£
2006	0.51
2007	0.60
2008	0.68
2009	0.77
2010	0.90

The risk-free rate is assumed to be 4% per annum and the expected market’s return is set to be 10% for the foreseeable future.

Required:

a) What is the balance sheet value of Falcon Ltd.?

b) What is the market value of the bond in Falcon, assuming that the market risk, beta, of the bond is 0.5?

c) Suppose a similar quoted company to Falcon Ltd. has an observed beta of 1.1. Estimate the equity value of Falcon.

d) What is the value of Falcon based on (b) and (c) above?

e) Why is your answer to (a) different from (d)?