Structure of the company and governance

KL is structured as a group of wholly-owned subsidiaries. Each subsidiary specializes in a particular product or service. Each subsidiary is run by a board of executive directors, and the overall company has a board comprising 6 executive directors.

KL has in place an audit committee, led by the Finance Director (executive) and including two of the non-executive directors. This committee has responsibility for acting as the primary liaison with the external auditors, as well as contributing to the review of international controls and risk management.

KL also has a group remuneration committee of non-executive directors, led by the non-executive chairman. This committee meets twice a year to review directors performance and their remuneration packages.

Financial data

Key data for the group for the most recent year (to 31 December 2020) is as follows:

Turnover Rs 850 million

Earnings Rs 105 million

Shares in issue 250 million

Nominal Value per share Rs 2.00

Payout ratio 75%

Total Assets Rs 650 million

Cash and Bank Balance Rs 80 million

Total Liabilities Rs 150 million

Weighted Average Cost of Capital for the group 14% (nominal post-tax rate)

Share price today (04^th July 2021) Rs 7.30

Notes on the financial date:

• 75% of the turnover arises in the UK, with 15% in Indian and 10% in Pakistan.
• Treasury bill rate is 6%
• Foreign sales are always invoiced to customers in their local currency. KL does not tend to hedge the currency risk on these sales for two reasons:

- the customers generally pay within 30 day of the invoice date

- the main currency involved (US$) is considered to be stable.

• The share price has fluctuated between Rs 5.20 to Rs 8.4 over the last year.
• Experts believes that the company belongs to services sector.

KL Group -Future plans

The company has revisited the stated objectives and the new version is as follows:

• To increase operating cash flow and dividends per share year-on-year by at least 10%.
• Maintain the Weighted Average Cost of Capital at 14% (nominal post-tax rate) the group.

To plan for a modest improvement to, current regulations and produce accordingly. This alternative has greater flexibility as there is a much larger market, worldwide, for processing waste at a lower and therefore much cheaper specification. The capital cost to the KL Group PLC would also be much lower at Rs 30 million. Equipment for tis alternative is readily available in the UK and can be bought when the factory conversion is completed. However, the equipment is likely to need to be replaced in six years time from the date of purchase.

The directors also found the fair value of the assets has increased by 15% and Liabilities has increased by 10%. The company is aware that the SL government may introduce tougher controls, so the directors of the KL Group plc wish to consider an option to merge with an international group which is specialized in this industry. The directors are considering establishing this relationship may lead KL to be stronger and more competitive. As the finance manager of the company, Board has requested you to analyze the facts and come up possible value for the firm.

Assess possible values that you may propose to the board of directors with the use of different valuation models and Recommend the best valuation model and the value for the merger. State your assumptions clearly.