Question

Requirements

Using the information provided, prepare a report for Rogers’s board which:

(1) Calculates the value of one share in Moog based on each of these methods:

(i)​net asset basis (historic cost).

(ii)​net asset basis (revalued).

(iii)​price/earnings ratio.

(iv)​dividend yield.

(v) ​present value (at 28 February 2018) of future cash flows assuming disposal after 4 years. (16 marks)

(2) Explains the advantages and disadvantages of using each of the five valuation methods in (1). (9 marks)

Total: 25 marks

Portfolio Rogers You are employed by Rogers UK plc (Rogers), a very large printing firm with retail outlets across the UK. Its board is considering making an offer to buy 100% of the shares of Moog Ltd, a competitor of Rogers in the south east of England. Moog's financial year end is 28 February and its most recent financial statements are summarised below: Moog Income Statement for the year ended 28 February 2018 £m Revenue 17.3 Profit before interest and tax 5.9 Interest (0.3) Profit before taxation 5.6 Corporation tax at 28% (1.6) Profit after taxation 4.0 Dividends declared 1.1 cost Moog Balance Sheet at 28 February 2018 £m£m£m Non-current assets Freehold land and buildings (original £4.1m) 3.5 Machinery (original cost £8.8m) 5.3 8.8 Current assets Inventories 3.0 Receivables 0.5 Cash and bank 2.8 6.3 Current liabilities Trade payables 3.5 Dividends 1.1 Taxation 1.6 (6.2) 0.1 8.9 (3.0) Non-current liabilities 10% debentures (redeemable 2022) 5.9 Equity Ordinary shares of £1 each 2.1 Retained earnings 3.8

Answer 1

Moog
1. Calculation of Value of one share of Moog:
		Amounts (Mn. £)	Amounts (Mn. £)
Sr.No.	Particulars	Cost Basis	Fair Value Basis
1	Freehold Land and Building	3.50	8.30
2	Machinery	5.30	4.10
3	Inventory	3.00	3.10
4	Receivables	0.50	0.50
5	Cash and Bank	2.80	2.80
6	Total Assets	15.10	18.80
7	Trade Payables	3.50	3.50
8	Dividends	1.10	1.10
9	Taxation	1.60	1.60
10	10% Debentures	3.00	3.00
11	Net Assets	5.90	9.60
12	Shares Outstanding (Mns.)	2.10	2.10
13	Value per share (11/12) £ -Net Assets Basis	2.81	4.57
14	Net Income after Tax	4.00
15	Shares Outstanding (Mns.)	2.10
16	EPS (14/15)	1.90
17	PE Ratio	9.00
18	MPS (16*17) (£) - Based on PE Multiple	17.14
19	Dividends Declared (Mn.£)	1.10
20	Dividend/Share (£)	0.52
21	Dividend Yield Ratio	6%
22	MPS (20/21) (£) - Based on Dividend Yield Ratio	8.73
Q2	Value per share based on present value of cash flows:
Year	Particulars	Calculations	Cashflows (after tax)	PVF @ 14%	PVCF
2019	Annual Cashflow After tax	=4.60 (1-0.28)	3.31	0.8772	2.91
2020	Annual Cashflow After tax	=4.30 (1-0.28)	3.10	0.7695	2.38
2021	Annual Cashflow After tax	=5.20 (1-0.28)	3.74	0.6750	2.53
2022	Annual Cashflow After tax	=5.70 (1-0.28)	4.10	0.5921	2.43
2022	Terminal Cashflow - Note 1	=4.10*4* (1-0.28)	11.82	0.5921	7.00
	Total Net Cash Flow				17.24
	Shares Outstanding				2.10
	Value per share based on present value of cashflows				8.21
Note:1	It is assumed that terminal cashflows are also taxable to same tax rate
Sr.No.	Particulars	Value per share
1	Net Assets Value - Cost basis	2.81
2	Net Assets Value - FMV basis	4.57
3	PE Multiple Basis	17.14
4	Dividends Yield Basis	8.73
5	Cashflow Basis	8.21
	Method
1	Net Assets Value - Cost basis Advantages : 1. Calculates the asset backup behind each outstanding share, it is important to know this because when company goes in liquidation how likely are the holders of ordinary shares to get their capital invested returned. Disadvantage: 1. Fails to record prices based current fair value, 2. Fails to capture rate of return on investment.
2	Net Assets Value - FMV basis Advantages : 1. Calculates the asset backup behind each outstanding share, it is important to know this because when company goes in liquidation how likely are the holders of ordinary shares to get their capital invested returned. Disadvantage: 1. Fails to capture rate of return on investment. 2. Value takes into account current fair market value, this may or may not be realised in case of liquidation if there is substantial time gap between realisation and FMV calculation.
3	PE Multiple: Advantages: 1. Represents the market reward expectation and takes into account not only cash dividends paid but actual profits attributable per share (EPS) i.e future growth perspective is also considered here. Disadvantages: 1. Fails to take into account asset back up that each share has in case if the company goes into liquidation.
4	Dividend Yield Basis: Advantages: 1. Represents markets rate of return required in the form of cash distribution. 2.Based on actual cash distribution rather than future cash flow estimation. Disadvantages: 1. Fails to take into account asset back up that each share has in case if the company goes into liquidation. 2. Fails to consider future growth opportunities that the company may have.
5	Cashflow Basis: Advantages: 1. Represents cashflow attributable to each share, 2. Represents absolute figure rather than (%) figure for taking judgement. Disadvantage: 1.Fails to take into account asset back up that each share has in case if the company goes into liquidation. 2.Based on future cashflow projections which may or may not go right, ignoring current market conditions and rewards.