C) Explain what other information might be useful in valuing XYZ? Ambition Ltd i
ID: 2726707 • Letter: C
Question
C) Explain what other information might be useful in valuing XYZ?
Ambition Ltd is owned by an entrepreneur and XYZ, a venture capital group. At present its capital structure is as follows: The preferred shares are each convertible into 2 ordinary shares and the convertible loam stock may be converted into 100 ordinary shares per A 100 of loan stock. Both of these classes of securities are owned only by XYZ. The current after tax earnings of the company are pound 60m. These are expected to grow at 8% per annum and no dividends are paid at present. No dividends are payable in respect of the preferred shares and the loan stock carries no interest. XYZ is considering obtaining a listing for the company on the London Stock Exchange and plans to convert both the preferred shares and the loan stock before doing this. After floatation it is predicted that the company will pay a dividend of 80% of the earnings per share, payable at the end of each year. It is examining the possible value of the company and has obtained the following information concerning three other hotel companies which currently have an LSE listing. You are also informed that the expected return on the FTSE All Share Index is 12% and the risk free rate of interest is 6%. Required: Using two different bases of valuation advice the company on the price at which shares might be issued. Advise XYZ what other methods of divestment might be adopted and explain their advantages and disadvantages relative to those of an IPO.Explanation / Answer
Average of equity beta = (1+1.3+1.2)/3 = 1.17 Risk free rate = 6% Market rate = 12% Cost of equity (Ke) = 6+1.17*(12-6) = 13.02% After tax earning = 60m growth rate = 8% Value of shares = 60m*(1.08)/(.13-.08) = 1296 Million Thus, value of shares could be £1296 Million
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