Question

Delta wants to take over Fire ltd considering the financial data as follows:

Balance sheets as at 31 December 2019

	£’000
Non-current assets	54,500
Current-assets	6,450
Total assets	60,950
Equity and liabilities
Ordinary share capital (£1 shares)	10,000
Retained profits	18,950
10% Debentures	24,500
Trade payables	7,500
Total equity and liabilities	60,950

Notes
The long-term liabilities of Fire plc are 10% Debentures.

Dividends were 15p per share in 2019 with a 5.5% dividend yield

Operating profits in 2019 £18,750,000
Net cash flow in 2019   £13,040,000
Predicted growth in profits after tax from 2019 0%

P/E ratio at 31 December 2019 8

The estimated required return on equity 12% (based on industry average)

You may assume that corporation tax is chargeable on profits before tax at a rate of 20%; Tax is paid in the year charged.

Net investment in non-current assets is stable, so cash expended each year is approximately equal to depreciation.

Required:

Prepare briefing notes in order to advise the main board of delta on the following matters:

1. (a) The possible price that the shareholders of Fire might expect (per share and in total) using each of the following methods:

   1. (i) Net assets

   2. (ii) P/E ratio

   3. (iii) Dividend yield

   4. (iv) Discountedcashflows

   Round the share price to the nearest penny.

2. (b) What are the main motives of mergers and acquisitions?

3. (c) Critically discuss the possible reasons that many mergers and acquisitions cannot achieve their initial expectations.

Answer 1