The Board of Directors of Rundum plc are contemplating a takeover bid for Carbo Ltd, an unquoted company which operates in both the packaging and building materials industries. If the offer is successful, there are no plans for a radical restructuring or divestment of Carbo’s assets.
Carbo’s Balance Sheet for the year ending 31 December 2005 shows the following:
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£m
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£m
|
Assets employed
|
|
|
Freehold property
|
|
4.0
|
Plant and equipment
|
|
2.0
|
Current assets:
|
|
|
stocks
|
1.5
|
|
debtors
|
3.0
|
|
cash
|
0.1
|
4.6
|
Total assets
|
|
10.6
|
Creditors payable within one year
|
|
(3.0)
|
Total assets less current liabilities
|
|
7.6
|
Creditors payable after one year
|
|
(1.0)
|
Net assets
|
|
6.6
|
Financed by
|
|
|
Ordinary share capital (25p par value)
|
|
2.5
|
Revaluation reserve
|
|
0.5
|
Profit and loss account
|
|
3.6
|
Shareholders’ funds
|
|
6.6
|
Further information:
(a) Carbo’s pre-tax earnings for the year ended 31 December 2005 were £2.0 million.
(b) Corporation Tax is payable at 33 per cent.
(c) Depreciation provisions were £0.5 million. This was exactly equal to the funding required to replace worn out equipment.
(d) Carbo has recently tried to grow sales by extending more generous trade credit terms. As a result, about a third of its debtors have only a 50 per cent likelihood of paying.
(e) About half of Carbo’s stocks are probably obsolete with a resale value as scrap of only £50,000.
(f) Carbo’s assets were last revalued in 1994.
(g) If the bid succeeds, Rundum will pay off the presently highly overpaid Managing Director of Carbo for £200,000 and replace him with one of its own ‘high-flyers’. This will generate pre-tax annual savings of £60,000 p.a.
(h) Carbo’s two divisions are roughly equal in size. The industry P:E ratio is 8:1 for packaging and 12:1 for building materials.
Required
(a) Value Carbo using a net asset valuation approach.
(b) Value Carbo using a price:earnings ratio approach.