XYZ Motors Co is a long$-$established listed company. Its main business is the

retailing of new and used motor cars and the provision of after$-$sales 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 medium$-$long term agreements. Approximately $80\%$ 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 well$-$known major

motor manufacturer. SM is a long$-$established 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 $50\%$ of SM$\text{'}$s shares might be willing to accept CM shares as part of

the deal.

The forecast earnings of CM for the next financial year are $$35$ million. According to

the Managing Director of SM$,$ his company's earnings are expected to be $$4$ million

for the next financial year.

Financial statistics and other information on XYZ and SM are shown below:

XYZ SM

Shares in issue $($millions$)251\mathrm{.}5$

Earnings per share $($cents$)112\mathrm{.}5153$

Dividend per share $($cents$)50\mathrm{.}6100$

Share price $($cents$)1237$ N$/$A

Net asset value attributable to equity $($$m$)35045$

Debt ratio $200$

$($outstanding debt as percentage of total market value of company$)$

Forecast growth rate percentage $($constant$,$ annualised$)45$

Cost of equity $9\%$ N$/$A

SM does not calculate a cost of equity, but the industry average for similar

companies is $10\%$

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. $(10$ marks$)$

$($b$)$ The financial factors relating to both companies that might affect the bid.

$(10$ marks$)$

$($c$)$ Explain the practical considerations in the valuation of shares and businesses.

$(5$ marks$)$