BUSINESS VALUATION

Q: ABC Co is a listed company which is seen as a potential target for acquisition by financial
analysts. The value of the company has therefore been a matter of debate in recent weeks and
the following financial information is available:
Year 2012 2013 2014 2015
Profit after tax (Rs. in million) 8·5 8·9 9·7 10·1
Total dividends (Rs. In million) 5·0 5·2 5·6 6·0
Statement of financial position information for 2015
Rs.’m Rs.’ m
Non-current assets 91·0
Current assets
Inventory 3·8
Trade receivables 4·5 8·3
–––– –––––
Total assets 99·3
–––––
Equity finance
Ordinary shares 20·0
Reserves 47·2 67·2
––––
Non-current liabilities
8% bonds 25·0
Current liabilities 7·1
–––––
Total liabilities 99·3
––––
The shares of ABC Co have a nominal (par) value of 50 paisa per share and a market value of
Rs. 4·00 per share. The business sector of ABC Co has an average price/earnings ratio of 17
times, earning yield of 5.88% and dividend yield of 2.94%. The expected net realizable values of
the non-current assets and the inventory are Rs. 86·0m and Rs. 4·2m, respectively. In the event
of liquidation, only 80% of the trade receivables are expected to be collectible. Yield on
government bonds is 4%, market risk premium is 10% and ABC Co has equity beta of 0.50.
Required:
1. Calculate Market Value of ABC equity using:
i. Market capitalization method
ii. Price/earning ratio method
iii. Earning Yield Method
 Without growth
 With constant growth in earning of 2% p.a expected in future
iv. Dividend Yield Method
v. Net asset Value (liquidation basis)
vi. Dividend valuation model (without growth)
vii. Dividend valuation model (with growth)
a) Using historical growth
b) Using Gordon’s growth model (g = bre)
The 8% bonds are redeemable at nominal (par) value of $100 per bond or can be converted into
25 ordinary shares in seven years’ time. Current market value of share is $ 4 per share and
expected to grow at 5% pa. Pre-tax cost of debt of ABC Co is 6% per year.
2. Calculate Market Value of 8% bonds of ABC Co.

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