Bolek plc and Rafal plc are two businesses operating in different industries

jagguarpaw January 13, 2017 0 Comments

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Question: Question 3 Bolek plc and Rafal plc are two busines…

Question 3 Bolek plc and Rafal plc are two businesses operating in different industries from one another. They are both financed by a mixture of ordinary share and loan capital and both are seeking to derive the cost of capital for investment decision making purposes. The following information is available concerning the two businesses for the year to 30 November 2014: Bolek plc Rafal plc Profit for the year £3.0m £4.0m Gross dividends £1.5m £2.0m Market value per ordinary share £4.00 £1.60 Number of ordinary shares 5m 1 0m Gross interest yield on loan capital 8% 1 2% Market value of loan capital £10m £16m The annual growth rate in dividends is 5 per cent for Bolek plc and 8 per cent for Rafal plc. Assume a 30 per cent tax rate.

Required: (a) Calculate the weighted average cost of capital of Bolek plc and Rafal plc using the information provided. (30% of Marks)

The most recent balance sheet for Fakah plc is given below.

Balance Sheet as at 31 December 2014

£m £m £m Assets Employed

Non-current Assets: Tangible 90 Intangible 70 160

Current Assets: Stocks and Work in Progress 40 Debtors 15 Cash 5 60

Current Liabilities: Trade Creditors (5) Bank Overdraft (10) (15)

Net Current Assets 45

10% Loan Stock (60)

Net Assets 145

Financed by:

Issued Share Capital (par value 25p) 50

Revenue Reserves 95

Shareholders’ Funds 145

MAN4154M_A&F_MSc_Jan 16_Main_Section B Page 6 of 6

Further Information

1) During 2013 Fakah plc made sales of £200m, with a net operating margin (i.e. after depreciation but before tax and interest) of 25%.

2) The rate of corporation tax is 25%.

3) Fakah’s sales are volatile, having ranged between £100m and £200m over the previous three years.

4) The tangible fixed assets have recently been revalued (by the directors) at £220m.

5) The intangible assets represent Research and Development for a major project. A competitor has recently made significant progress in a similar area which undermines the projected profitability figures, making the project only just viable.

6) Fakah plc’s current P:E ratio is 12:1

7) Fakah plc depreciates tangible fixed assets at the rate of £5m per annum.

8) The interest charge on the overdraft is 10%.

9) Annual fixed investment is £5m. Ignore capital allowances. It is assumed that due to strong competition Fakah plc will be able to operate independently before being sold to a competitor at the end of 2018 for £200m.

Discount rate with discount factors: 10% Period 1 0.909

2 0.826 3 0.751 4 0.683 5 0.621 3.790

Required: (b) Determine the value of Fakah plc using each of the following methods and making adjustments where necessary (state your assumptions):  Net Asset Value (10% of marks)

 Price: Earnings ratio

(20% of marks)

 Discounted Cash Flow (using a discount rate of 10%)