Asset based valuation - example, Finance Basics

Asset Based Valuation - Example

K and K Company Limited is planning to absorb three other companies so as to realize its sales records of Sh.500, 000 per annum.  Its accountants have advised the company to keep such a size which will enable its shares to sell at a minimum price about Sh.16. last published balance sheets of the company is shows as given:

                                                                  Sh.'000'

Ordinary shares of Sh.10 each                    50,000

Reserves                                                    65,000

Current liabilities                                        40,000

Total                                                          155,000

Assets:                                                        Sh.

Fixed assets                                                80,000

Current assets                                            75,000

Total                                                          155,000

For the last 5 years profits were as follows:

     Sh.'000'

1.  9,000

2.  6,000

3.  10,000

4.   8,000

5.   17,000

P/E ratio applicable is 12:1

Estimate the value of the business indicating the lowest offer price and the highest offer price and the share value thereof if it would be viable to take on the three companies if it's to maintain this share value.

P/E Ratio Method

P/E = 12:1   Average profits = 10,000,000

Therefore Value of business  = 10,000,000 x 12

                                                = Sh.120,000,000

Value of shares = Sh.120 million / 5 million shares

                          = Sh.24

Assets Method

                                                Sh.'000'

Assets                                     155,000

Less: Current liabilities          [40,000]

                                                115,000                                                              

Value of shares             =        Sh.115M/5M shares

                                       =         Sh.23

Where like: Po = Price of ordinary shares

                   d   = Dividend at the ending of year one

                    P1 = Price of the share at the ending of one year.

Posted Date: 1/31/2013 2:11:26 AM | Location : United States







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