Question 4

Pegasus Ltd is a wholly-owned subsidiary of Sarkar plc. Although the subsidiary has performed satisfactorily, Sarkar plc is considering selling its subsidiary to another conglomerate in order to raise finance.

The most recent balance sheet of Pegasus Ltd is as follows:

Statement of financial position (balance sheet) as at 30 September 20X4 m		m		m
Fixed assets
Freehold land and buildings at cost			53.5
Less Accumulated depreciation		10.2		43.3
Fixtures and fittings at cost			8.6
Less Accumulated depreciation		2.9		5.7
Motor vehicles at cost			3.2
Less Accumulated depreciation		1.4		1.8
50.8
Current assets
Stock at cost			47.5
Trade debtors			23.4
Cash at bank		21.5		92.4
Less Creditors: amounts falling due within one year
Trade creditors			25.9
Corporation tax	5.4		31.3		61.1
111.9
Less Creditors: amounts falling due after one year
Debentures			49.0
62.9

Extracts from the profit and loss account for the year ended 30 September 20X4 are as follows:

m

Net profit after taxation 9.3

Dividend proposed and paid 3.3

A bid of 3.50 per share for the shares in Pegasus Ltd has been received from Coric plc. The agreed price would be paid in shares by the bidding company.

The following details were taken from a financial newspaper concerning the shares of Zing Ltd, a business similar to Pegasus (?) operating in the same industry that is listed on the Stock Exchange and Coric plc, the conglomerate company that has made the bid:

20X320X4 High	Low	Stock		Price	or		Dividend	Cover		Yield	P/E
(net)			(times)			(gross%)			(times)
640p	580p	Zing		615p	+5p		12.0p	2.5		2.2	20.5
1089p	530p	Coric		1089p	+2p		15.0p	3.0		1.5	24.2

An independent valuer has recently estimated the current realisable value of the companys (Peagasus) assets as follows:

m

Freehold land and buildings 104.2

Fixtures and fittings 3.5

Motor vehicles 0.4

Stocks 58.0

The balance sheet values of the remaining assets were considered to reflect their net realisable values.

Tax on dividends is assumed to be at a rate of 10%.

Required:

(a) Calculate the value per share of Pegasus Ltd using the following valuation methods:

(i) net assets (liquidation) basis;

and

(ii) price/earnings ratio basis.

(15 Marks)

(b) Briefly evaluate the strengths and weaknesses of each of the share valuation methods set out in (a) above. (5 Marks)

(c) Comment on the bid that has been received from Coric plc and explain whether or not the bid should be accepted. (5 Marks)