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XYZ Motors Co is a long - established listed company. Its main business is the retailing of new and used motor cars and the provision
XYZ Motors Co is a longestablished listed company. Its main business is the
retailing of new and used motor cars and the provision of aftersales service. It has
sales outlets in most of the major towns and cities in the country. It also owns a
substantial amount of land and property that it has acquired over the years, much of
which it rents or leases on mediumlong term agreements. Approximately of its
net current asset value is land and buildings.
The company has grown organically for the last few years but is now considering
expanding by acquisition. SM owns a number of car showrooms in wealthy, semi
rural locations. All of these showrooms operate the franchise of a wellknown major
motor manufacturer. SM is a longestablished private company with the majority of
shares owned by the founding family, many of whom still work for the company. The
major shareholders are now considering selling the business if a suitable price can
be agreed. The Managing Director of SM who is a major shareholder, has
approached CM to see if they would be interested in buying SM He has implied that
holders of up to of SMs shares might be willing to accept CM shares as part of
the deal.
The forecast earnings of CM for the next financial year are $ million. According to
the Managing Director of SM his company's earnings are expected to be $ million
for the next financial year.
Financial statistics and other information on XYZ and SM are shown below:
XYZ SM
Shares in issue millions
Earnings per share cents
Dividend per share cents
Share price cents NA
Net asset value attributable to equity $m
Debt ratio
outstanding debt as percentage of total market value of company
Forecast growth rate percentage constant annualised
Cost of equity NA
SM does not calculate a cost of equity, but the industry average for similar
companies is
Assume you are a financial manager working with XYZ Advise the Board on the
following issues in connection with a possible bid for SM:
a Methods of valuation that might be appropriate and a range of valuations for
SM within which XYZ should be prepared to negotiate. marks
b The financial factors relating to both companies that might affect the bid.
marks
c Explain the practical considerations in the valuation of shares and businesses.
marks
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