Pakton Ltd, a company quoted on the ASX, has cash balances of $23 million which are currently invested in short-term money market deposits. The cash is intended to be used primarily for strategic acquisitions, and the company has formed an acquisition committee with a role to identify possible acquisition targets. The committee has suggested the purchase of a smaller company, Wallard Pty Ltd, an unquoted company in a different industry. The directors of Mallard have indicated they might be prepared to sell for $22 million.

A). Estimate the value of Mallard based upon:

(i) the use of comparative P/E ratios

(ii) the dividend valuation model

(iii) asset valuation method

iv) Recommend whether or not Oakton should offer $22 million for Mallard and state the value of Goodwill that would be established if the sale proceeds.

B) Briefly discuss the factors that might influence whether Oakton uses its cash balances rather than shares or bonds, to make payment for Mallard.

Mallard 5'000 38,000 5,300 1,749 3,551 842 8,400 4,700 3,900 9,200 Oakton Turnover Pretax operating cash flow Taxation (33%) Post tax operating cash flow Dividend Fixed assets (net) Current assets Current liabilities 5000 480,000 51,000 16,830 34,170 11,000 168,000 135,000 99,680 203,320 Financed by Ordinary shares (25c par) Reserves 12% debentures 10% bank loan 10,000 158,320 20,000 15,000 (10c par) 500 5,200 11% bank loan 3,500 203,320 9,200 Current share price Earnings yield Av. Dividend growth over past 5 years Equity beta Industry data: Average P/E ratio Average P/E of companies recently Taken over, based on the offer price 785 cents 10.9% 370 cents 19.2% 8%pa 0.8 7% pa 0.95 10:1 12:1 The risk-free rate of return is 6% per annum and the market return 14% per annum. Land and Buildings is shown at a book value of $5 million but has never been revalued to current market value. The current replacement cost for these land and buildings is estimated at $12 million. If Oakton acquires Mallard it expects to restructure and save $750,000 in salaries, reduce advertising by $150,000, but incur additional $300,000 in consultancy costs Mallard 5'000 38,000 5,300 1,749 3,551 842 8,400 4,700 3,900 9,200 Oakton Turnover Pretax operating cash flow Taxation (33%) Post tax operating cash flow Dividend Fixed assets (net) Current assets Current liabilities 5000 480,000 51,000 16,830 34,170 11,000 168,000 135,000 99,680 203,320 Financed by Ordinary shares (25c par) Reserves 12% debentures 10% bank loan 10,000 158,320 20,000 15,000 (10c par) 500 5,200 11% bank loan 3,500 203,320 9,200 Current share price Earnings yield Av. Dividend growth over past 5 years Equity beta Industry data: Average P/E ratio Average P/E of companies recently Taken over, based on the offer price 785 cents 10.9% 370 cents 19.2% 8%pa 0.8 7% pa 0.95 10:1 12:1 The risk-free rate of return is 6% per annum and the market return 14% per annum. Land and Buildings is shown at a book value of $5 million but has never been revalued to current market value. The current replacement cost for these land and buildings is estimated at $12 million. If Oakton acquires Mallard it expects to restructure and save $750,000 in salaries, reduce advertising by $150,000, but incur additional $300,000 in consultancy costs