The Board of Directors of Begum plc, a listed company, have constituted an acquisition committee

to research and consult widely as a pre-cursor to considering making takeover bids for two

competitors. One is KL plc, also a listed company and the other PVT Ltd., is a private company.

Summarised below are financial data for the three companies:

Additional information:

1. The current assets of Begum plc include 5m cash.
2. Ordinary share capitals of KL and PVT comprise 1 ordinary shares, while that of Begum comprises 50p shares.
3. Begums liability, payable after 1 year, comprises 8% debentures trading at 80 per 100 of debentures.
4. KLs liability, payable after 1 year, comprises 11% debentures trading at 110 per 100 of debentures.
5. PVTs liability, payable after 1 year, is 7-year 10% bank loan.

The corporation tax rate is 17%.

REQUIRED:

1. Prepare a report, including your calculations as an appendix, advising the Board of Begum plc on the possible cost of acquiring each of the companies, using
   1. The P/E ratio method,
   2. Dividend valuation method, i Asset valuation method.

2. Employ the Enterprise Value to EBITDA multiple of both KL plc and Begum plc to calculate estimated equity values for PVT Ltd., and comment on your results.

3. Discuss alternative terms that might be offered to the shareholders of KL plc and PVT Ltd.

Balance Sheets as at 31 March 20X2. Begum Non-current Assets Current Assets 43 Less 27 Payable within 1 year Less Payable after 1 Year Ordinary Share Capital Ordinary shares Retained Profit Additional information: m 50 16 19 47 17 30 47 KL 6.7 3.0 m 8.6 3.7 6.0 6.3 5.0 1.3 6.3 PVT 9.5 3.9 m 6.4 5.6 5.5 6.5 2.8 3.7 6.5 Average Sales Growth Average Growth in profit after tax and interest on medium- and long-term debt, previous 5 years Average Payout Ratio, previous 5 years P/E ratio at 31 March 20X2 Estimated required return on equity Depreciation charge Profit before tax and interest on medium- and long- term debt, previous 5 years Begum 8% 6% 60% 18.4 9.5% 2m 10m KL PVT 10% 8% 10.5% 9.5% 40% 75% 18.6 N/A 12% 13% 0.5m 0.2m 1.5m 1.4m Balance Sheets as at 31 March 20X2. Begum Non-current Assets Current Assets 43 Less 27 Payable within 1 year Less Payable after 1 Year Ordinary Share Capital Ordinary shares Retained Profit Additional information: m 50 16 19 47 17 30 47 KL 6.7 3.0 m 8.6 3.7 6.0 6.3 5.0 1.3 6.3 PVT 9.5 3.9 m 6.4 5.6 5.5 6.5 2.8 3.7 6.5 Average Sales Growth Average Growth in profit after tax and interest on medium- and long-term debt, previous 5 years Average Payout Ratio, previous 5 years P/E ratio at 31 March 20X2 Estimated required return on equity Depreciation charge Profit before tax and interest on medium- and long- term debt, previous 5 years Begum 8% 6% 60% 18.4 9.5% 2m 10m KL PVT 10% 8% 10.5% 9.5% 40% 75% 18.6 N/A 12% 13% 0.5m 0.2m 1.5m 1.4m