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Question 4

Chocolate Plc, a retail company, is considering a takeover bid for Butterspread Plc, a smaller company in the same industry. Chocolate Plc would be buying Butterspread Plc as a going concern.

Extracts from Butterspread Plcs Income statement is as follows:

000

Revenue 1000

Cost of Sales 200

Gross profit 800

Operating expenses 40

Profit from operations 760

Finance costs 60

Profit before tax 700

Taxation (30%) 210

Profit after tax 468

Extracts from Butterspread Plcs Statement of Financial Position:

Non-current assets (Note 1) 3000

Current assets (Note 2) 600

Total assets 3600

Share capital 200

Reserves 1106

Equity 1306

Loan 1200

Current liabilities 1094

Total equity and liabilities 3600

Note 1: The Land and buildings has not been revalued for several years and after an extensive revaluation process the current price has increased the valuation by 400,000, this is not reflected in the extract above.

Note 2: Cash contain an amount of 120,000 from a large customer which has just gone missing from the companys vault. A contract from another customer, included in Inventory at a value of 60,000 will now have to be scrapped.

Other information:

• Selling prices are expected to remain constant.
• Sales volumes are expected to rise at 10% pa for the next 3 years and then stay constant thereafter.
• Assume that cost of sales is a completely variable cost, and that other operating expenses and finance costs are expected to stay constant.
• The discount factor of Butterspread Plc is 9%
• Dividends are growing at 6% per annum.
• The P/E ratio of Butterspread Plc is 10.
• Butterspread Plc currently has 100,000 shares in issue.

Required:

1. Produce a report to the Board of Directors of Chocolate Plc suggesting a Minimum and Maximum bid price you consider appropriate for Butterspread Plc.

2. The report should include and explain the derivation of a range of bid prices using:

• Net Asset Valuation
• P/E Ratio valuation
• Dividend Valuation Model

3. The report must also include five (5) reasons why it might be beneficial for Chocolate Plc to acquire Butterspread Plc.

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