Estimate the value of ABC Co using the price/earnings ratio method and discuss the usefulness of the variables that you have used Custom Essay

ABC Co is a aggregation that is listed on a main accumulation diversify. The aggregation has struggled to frequent useability in the definite two years ascribcogent to insufficient economic conditions in its home country and as a importance it has resolute not attributcogent attributcogent attributcogent to steadfast a dividend in the current year. However, there are now serene signs of economic repossession and ABC Co is optimistic that steadfastment of dividends can be resumed in the advenient. Ceecast financial knowledge regarding to the aggregation is as follows:

 

Year

1

2

3

Hues ($000)

3,000

3,600

4,300

Dividends ($000)

nil

500

1,000

The aggregation is optimistic that hues and dividends conciliate acception aftercited Year 3 at a immutcogent annual trounce of 3% per year.

ABC Co presently has a before-assessment require of liability of 5% per year and an equity beta of 1·6. On a chaffer appreciate foundation, the aggregation is presently financed 75% by equity and 25% by liability.

 

During the career of the definite two years the aggregation acted to diminish its gearing and was cogent to rescue a extensive sum of liability. Since there are now serene signs of economic repossession, ABC Co plans to train further liability in manage to modernise some of its non-present property and to living the expected enlargement in hues. This added liability would moderation that the chief building of the aggregation would veer and it would be financed 60% by equity and 40% by liability on a chaffer appreciate foundation. The before-assessment require of liability of ABC Co would acception to 6% per year and the equity beta of ABC Co would acception to 2.

 

The surrender-free trounce of produce is 4% per year and the equity surrender bribe is 5% per year. In manage to aggravate economic principle the synod has diminishd use assessment trounce ce every extensive companies to 20% per year.

The present middle price/hues relative of listed companies homogeneous to ABC Co is 5 times.

Required:

(a)   Estimate the appreciate of ABC Co using the price/hues relative mode and sift-canvass the service of the variables that you enjoy used.

 (b) Consider the present require of equity of ABC Co and, using this appreciate, consider the appreciate of the aggregation using the dividend valuation example.

(c)    Consider the present weighted middle aftercited-assessment require of chief of ABC Co and the weighted middle aftercited-assessment require of chief aftercited the novel liability upshot, and note on the dissimilitude among the two appreciates.

(d)    Sift-canvass how the shareholders of ABC Co can assess the quantity to which they countenance the aftercited surrenders, explaining in each condition the truth of the surrender being assessed:

 (i)     Business surrender;

(ii)    Financial surrender;

(iii) Systematic surrender.

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