Further information:

1. In 200405, Vadeema made sales of 300 million, with a 25 per cent net operating margin (i.e. after depreciation but before tax and interest).

2. The rate of corporate tax is 33 per cent.

3. Vadeemas sales are quite volatile, having ranged between 150 million and 350 million over the previous five years.

4. The tangible fixed assets have recently been revalued (by the directors) at 65 million.

5. The intangible assets include a major patent (responsible for 20 per cent of its sales) which is due to expire in April 2006. Its book value is 20 million.

6. 50 per cent of stocks and work-in-progress represents development work for which no firm contract has been signed (potential customers have paid for options to purchase the technology developed).

7. The average P:E ratio for quoted drug research companies at present is 22:1 and for pharmaceutical manufacturers is 14:1. However, Vadeemas own P:E ratio is 20:1.

8. Vadeema depreciates tangible fixed assets at the rate of 5 million p.a. and intangibles at the rate of 25 million p.a.

9. The interest charge on the overdraft was 12 per cent.

10. Annual fixed investment is 5 million, none of which qualifies for capital allowances:

Required

a) Determine the value of Vadeema using each of the following methods:

i. net asset value

ii. price:earnings ratio

iii. discounted cash flow (using a discount rate of 20 per cent)

b) How can you reconcile any discrepancies in your valuations?

c) To what extent is it possible for the Stock Market to arrive at a correct valuation of a company like Vadeema?

Balance Sheet as at 30 June 2005 m m Em 50 120 170 80 20 5 105 Assets employed Fixed assets Tangible Intangible Current assets Stock and work in progress Debtors Bank Current liabilities Trade creditors Bank overdraft Net current assets 10% loan stock Net assets Financed by Ordinary shares capital (25p par value) Share premium account Revenue reserves Shareholders' funds (10) (20) (30) 75 (40) 205 100 50 55 205 Balance Sheet as at 30 June 2005 m m Em 50 120 170 80 20 5 105 Assets employed Fixed assets Tangible Intangible Current assets Stock and work in progress Debtors Bank Current liabilities Trade creditors Bank overdraft Net current assets 10% loan stock Net assets Financed by Ordinary shares capital (25p par value) Share premium account Revenue reserves Shareholders' funds (10) (20) (30) 75 (40) 205 100 50 55 205