Required:

Calculate a range of values for Fern using FOUR (4)

methods of share valuation (from lecture notes).
Show all workings.
FOUR (4) methods of share valuation:

1. Net Assets Value

= Ordinary share capital + Reserves
= RM50 million + RM43 million
= RM93 million

2. Price Earnings (PE) Method

= Net profit after taxation x Price-earnings ratio
= RM50 million x 11 times (proxy)
= RM550 million
FOUR (4) methods of share valuation:

3. Dividend Valuation Model

=
=
= RM444 million

(Constant Annual Dividend)

- this amount is expected to remain constant for the foreseeable future
FOUR (4) methods of share valuation:

4. Discounted Cash Flow (DCF) Method

Year Cash Flows Discount Factor Present Value
(RM mil) @9% (RM mil)
1 50 x (1+3%) = 51.5 0.917 47.226
2 51.5 x (1+3%) = 53.045 0.842 44.664
3 53.045 x (1+2%)/
0.842 650.816
onwards (9% - 2%) = 772.941
Total cash-based value = 742.706
Required:

Advise the owners of Fern about the relevance of each

of the FOUR (4) values calculated in part (a) above and
recommend (with reasons) an appropriate initial asking
price for the disposal.
1. Relevance of Net Assets Value

 The asset-based value represents the lower limit

floor value for the disposal of Fern. This value is
relevant to a company that is no longer in going
concerned because it reflects the break-up value of
the asset on disposal. Intangible assets are ignored.
2. Relevance of Price Earnings (PE) Method

 This value could provide Fern with a reasonable

market value as it is based on a proxy company.
This value provides a fair price for how much Fern's
owners should be asking, while also paying a
reasonable price for foreign multinationals.
However, Fern is not listed, and its market
capitalization should be lower than that of similar
public companies because Fern’s shares lack
marketability. Therefore, the price-earnings ratio
should be discounted by 20% to 30%.
3. Relevance of Dividend Valuation Model

 Due to the lack of control over corporate decisions,

dividend-based value is only relevant when valuing
minority shareholdings. In Fern's case, this value is
irrelevant because the entire company's stock is under
consideration for sale.
4. Relevance of Discounted Cash Flow (DCF) Method

• This value is the highest possible value because it is

calculated based on Fern's predicted future earnings
potential. While this may be the Fern owner's
preferred asking price, the buyer may disagree with
the forecasts and assumptions used in the calculation.
• Besides that, this is the maximum possible value,
which will give all the benefits to the existing owners
of Fern and nothing for the buyer.
Recommend an appropriate initial asking price for the disposal:

 An earnings-based valuation with a premium of

approximately 20% to 30% may be an appropriate starting
price for negotiation, as it is a fair and reasonable price based
on current market prices for similar proxy valuations.
 This is equivalent to RM660 million (RM550 million x
120%) to RM715 million (RM550 million x 130%).