Question 5

The CEO of R B Patel has made a proposal to its board to make a take-over offer of PBL Ltd. He is proposing to pay $3.15 per share. The current market share of PBL Ltd is $3.03. The CEO of R B Patel Ltd justifies the price offer, indicating that R B Patel is the largest customer of PBL Ltd, buying and retailing all the drinking water. It will be a natural addition to their business. The CEO of R B Patel indicates that the water business will grow at 2% per year and hence dividends will also grow at this rate. PBL Ltd has a beta of 1.2 and 15-year government bonds yield 1.5%. The average market returns on the stock exchange where PBL Ltd trades is 3.5%. Refer to the PBL Ltd 2020 Financials provided.

Required

The board of R B Patel is not convinced with the offer price and seeks your advice. Prepare a report for the R B Patel board whether the offer price is justified. Your report should include three different approaches. Show all your calculations. (20 marks)

NEEDED AS SOON AS POSSIBLE WITH FULL CALCULATIONS USING FORMULAS ....(NOT EXCEL)