Valuation Methods for Trojan plc

FINANCIAL MANAGEMENT

TABLE OF CONTENTS
QUESTION 2 – MERGERS AND TAKEOVERS...................................................................3
Calculating the value of Trojan plc using the following valuation methods.........................3
Critical evaluation of various valuation techniques...............................................................4
QUESTION 3 – INVESTMENT APPRAISAL........................................................................7
1. Application of different investment appraisal techniques..................................................7
2. Benefits and limitations of different investment appraisal techniques............................11
REFERENCES.........................................................................................................................14

QUESTION 2 – MERGERS AND TAKEOVERS
Calculating the value of Trojan plc using the following valuation methods
a. Price/earnings ratio
Earnings per share = Distributable earnings /number of
shares
40.4/147
0.27
Market price per share 2.05
Price earnings ratio = Market price per share/Earning per
share
2.05/0.27
7.46
Value of the firm 7.46*40.4
301.38 pounds
b. Dividend valuation method
Market price = D(1+g) / (Ke-g)
As per CAPM,
Ke = Rf+(Rm-Rf) ß
= 5+(11-5) *1.1
11.6
Market Price = 13(1+0.02) / (.116-
0.02)
138.125
Value of the firm = Market Price *
number of shares
20304.38 pounds
c. Discounted cash flow method
Discounted cash flow

Net operating profit 40.4
Add: depreciation 0
Add: change in working capital 0
Less: change in capital
expenditure
0
Free cash flow 40.4
Discounting rate = WACC = 9%
Present value of cash flow = Annual cash flow/discounting
rate
Cash flow growth rate 2%
= 40.4(1+0.02) / (0.116-0.02)
= 429.25
Value of firm 4769.44 pounds
Critical evaluation of various valuation techniques
Price/earnings ratio
The price earnings ratio is the relationship between market price per share and
earnings per share. The higher P/E ratio means higher expectation by the investor with
respect to the higher earnings in the future period (Moore, 2019). The connection between the
two demonstrates what the market is willing to pay is dependent upon the present level of
earnings of the company. It also helps in identifying whether the market is overvaluing or
undervaluing the organization. The increase in the earnings per share (EPS) will lead to
increase in the market value and on the other hand the fall in earnings per share will lead to
fall in the market price per share. This ratio is exceptionally helpful in comparing and
contrasting the organizations in a similar industry. In any case, the significant rise in the price
earnings ratio is viewed as the dangerous speculations when contrasted with the lower ones
and this is a result of the explanation that high proportion means higher expectations.
In case of mergers and acquisitions, it is very imperative for the company to compare
the ratio with other companies in the same industry. This ratio can be misshaped by the
organization relying on the how organization has represented the things and depends on the
accounting practices and standards which changes from nation to nation which includes