Part B:

The board of directors of Predator Co$,$ a listed company, is considering making an offer

to purchase Target Co$,$ a private limited company in the same industry. If Target Co is

purchased it is proposed to continue operating the company as a going concern in the

same line of business.

T$5$ is five years ago and T$1$ is the most recent year.

Predator Co $50$ cents ordinary shares AND Target Co$,25$ cents ordinary shares.

Ordinary share capital value of Predator Co$.$ is $$35m$ and that of Target Co$.$ is $$160m.$

Target's shares are owned by a small number of private individuals. Its managing director

who receives an annual salary of $$120,000$ dominates the company. This is $$40,000$ more

than the average salary received by managing directors of similar companies. The

managing director would be replaced, if Predator purchases Target.

The ordinary shares of Predator are currently trading at $430$ cents ex$-$div. A suitable cost

of equity for Target has been estimated at $15\%.$ Both companies are subject to

corporation tax at $33\%.$

Include for a $20\%$ downward adjustment in the P$/$E of predator that you will use for the

Target to account for the risk that Target Co$.$ may have due to its private operations.

$($ie$.$ P$/$E of Target $=0\mathrm{.}8x\frac{P}{E}$ of Predator Co$.)$

Questions

a$)$ Estimate the value of Target Co$.$ using the dividend valuation model.

b$)$ Estimate the value of Target Co$.$ using P$/$E method.

Note: You shall start with the P$/$E of Predator and bootstrap the Target Co$.$