Question 1

Blanes Plc, the retail butchers, is considering the purchase of ten shops from
Roberts Plc, the conglomerate. The information gathered on the ten shops
trading as a separate subsidiary company is as follows:

Balance sheet
m
Fixed assets 2
Current assets
Cash 0.1
Stock 0.6
Debtors 0.1
0.8
Current liabilities (0.5)
Long-term loan (1.0)
Net assets 1.3

Trading history
Year Earnings (m)
Last year 1.4
1 year ago 1.3
2 years ago 1.1
3 years ago 1.2
4 years ago 1.0
5 years ago 1.0

If the shops remain part of Roberts Plc, the earnings growth is expected to
continue at the average historical rate to infinity.

On the other hand, Blanes Plc management believes that the ten shops will
be a perfect fit with their own. There are no towns in which they both trade
and economies of scale can be obtained. Suppliers will grant quantity
discounts, which will save 1m per annum. Combined transportation costs
can be cut by 150,000 per year. These savings will remain constant for all
future years. In addition, the distribution depot used by the ten shops could be
closed and sold for 1.8m with no adverse impact on trading.

The rate of return required on a business of this risk class is 13% per annum.

Required:

i) Calculate the value of the shops to Roberts Plc shareholders.

ii) Calculate the value of the ten shops to Blanes shareholders on the
assumption that the required rate of return remains at 13% and
underlying growth continues at its historic rate.
Question 2

Go-Go Plc is a gaming company, which has developed a new gaming

console, the Z-Box. Sales are expected to soar in the near future and
earnings will rise, which will bring about an increase in the dividends paid to
shareholders.

However, the management of Go-Go Plc expects for the technology to be

copied by the end of the first 5 years, after which a more moderate growth
phase is to be expected for the next 5 years. After that, the gaming market will
have matured and the company will return to its normal constant growth
phase.

The company has just paid a dividend of 2. The growth rate for the fist 5-
year period is expected to be 10% per annum, followed by a more moderate
8% for the next 5-year period and then levelling off at 6% thereafter.

The required rate of return on investments in this risk class is 14%.

Required:

Calculate the current share price of Go-Go Plc.