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Category > Business & Finance Posted 27 May 2017 My Price 8.00

Rest well plc, a hotel and leisure

Rest well plc, a hotel and leisure company, is currently considering taking over a smaller private limited company, Stay good Ltd. The board of Rest well is in the process of making a bid for Staygood but first needs to place a value on the company. Rest well has gathered the following data:

Restwell

 

Weighted average cost of capital

12%

P/E ratio

12

Shareholders’ required rate of return

15%

Staygood

 

Current dividend payment

27p

Past five years’ dividend payments

15p, 17p, 18p, 21p, 23p

Current EPS

37p

Number of ordinary shares in issue

5m

 

It is estimated that the shareholders of Staygood require a rate of return 20 per cent higher than that of the shareholders of Restwell owing to the higher level of risk associated with Staygood’s operations. Restwell estimates that cash flows at the end of the first year will be £2.5m and these will grow at an annual rate of 5 per cent. Restwell also expects to raise £5m in two years’ time by selling off hotels of Staygood that are surplus to its needs. Given the earlier information, estimate values for Staygood using the following valuation methods:

(a) price/earnings ratio valuation;

(b) dividend growth model;

(c) discounted cash flow valuation.

 

 

 
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Status NEW Posted 27 May 2017 07:05 PM My Price 8.00

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