Multi Computers plc is a large corporation operating in the computer hardware business. The company expressed interest in acquiring the shares of Compex plc, a smaller company in the same industry. Compex plc is listed on the Alternative Investment Market (AIM) and the profits on ordinary activities after tax for the past five years are as follows: £000 2014 210 2013 190 2012 200 2011 180 2010 170 Compex plc has paid dividends of £55,000 for each of the past five years and predicted that the dividends payment will increase by 3.5% over the next five years. The nominal value of Compex plc ordinary shares is £1 each, and its share price at 31st of December, 2014 was £2.50, and its P/E ratio was 8.55 times. Multi Computers plc’s profit after tax for 2014 was £5m, and its WACC was 5%. Its P/E ratio at 31st of December, 2014 was 10 times. An examination of the proposed acquisition has determined incremental cash flows, over and above that expected from the separate companies, may be achieved by Multi Computers plc, following the acquisition of Compex plc, as follows: £000 2015 220 2016 240 2017 300 2018 310 2019 330 Required: Provide a discount cash flow valuation (DCF) of Compex plc. What would be the maximum price that Multi Computers plc should pay for Compex plc?
Multi Computers plc is a large corporation operating in the computer hardware business. The company expressed interest in acquiring the shares of Compex plc, a smaller company in the same industry. Compex plc is listed on the Alternative Investment Market (AIM) and the profits on ordinary activities after tax for the past five years are as follows:
£000
2014 210
2013 190
2012 200
2011 180
2010 170
Compex plc has paid dividends of £55,000 for each of the past five years and predicted that the dividends payment will increase by 3.5% over the next five years. The nominal value of Compex plc ordinary shares is £1 each, and its share price at 31st of December, 2014 was £2.50, and its P/E ratio was 8.55 times. Multi Computers plc’s profit after tax for 2014 was £5m, and its WACC was 5%. Its P/E ratio at 31st of December, 2014 was 10 times. An examination of the proposed acquisition has determined incremental cash flows, over and above that expected from the separate companies, may be achieved by Multi Computers plc, following the acquisition of Compex plc, as follows:
£000
2015 220
2016 240
2017 300
2018 310
2019 330
Required: Provide a discount cash flow valuation (DCF) of Compex plc. What would be the maximum price that Multi Computers plc should pay for Compex plc?
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