(answered) Restwell plc a hotel and leisure company is

planning to

Restwell plc, a hotel and leisure company, is planning to take over a smaller private limited
company, Staygood Ltd, and needs to place a value on the company. Restwell
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Restwell plc, a hotel and leisure company, is planning to take over a smaller private limited
company, Staygood Ltd, and needs to place a value on the company. Restwell has gathered
the following data:

Restwell

Weighted average cost of capital................................................12%

Price/earnings ratio..................................................................12

Shareholders' cost of equity....................................................15%

Staygood

Current dividend payment........................................................27p

Past five years' dividend payments.....................15p, 17p, 18p, 21p, 23p

Current EPS........................................................................37p

Number of ordinary shares in issue.............................................5m

It is estimated that the cost of equity of Staygood is 20 per cent higher (in relative terms) than
the cost of equity of Restwell, owing to the higher risk of Staygood's operations.

Restwell estimates that cash flows at the end of the first year will be £2.5m and these will grow
at an annual rate of 5 per cent. Restwell also expects to raise £5m in two years' time by selling
off hotels of Staygood that are surplus to its needs.

Given the earlier information, estimate values for Staygood using the following valuation
methods:

(a) Price/earnings ratio valuation;

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 (b) Dividend growth model;

(c) Discounted cash flow valuation.

Restwell plc a hotel and leisure company is planning to

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company-is-planning-to

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