The following figures are extr

The following figures are extracted from Tes plc’s Annual Report and Accounts.

The average risk premium over risk-free securities is 5 per cent. The risk-free rate of return is 6.25 per cent and Tes’s beta of 0.77 represents the appropriate adjustment to the average risk premium.


a. Calculate a revised net asset value (NAV) for the Tes group assuming the following:

– Buildings are overvalued in the balance sheet by £ 100m;

– 20 per cent of the debtors figure will never be collected;

– The stock figure includes £30m of unsalable stock;

– ‘Current investments’ now have a market value of £205m.

b. For what type of company and in what circumstances does NAV provide a good estimate of value?

c. If you assume that the dividend growth rate over the past 16 years is unsustainable, and that in the future the rate of growth will average half the rate of the past, at what would you value one share using the dividend growth model?

d. Given the answer in (d) for share price, what is the prospective price-earnings ratio (PER) if future earnings grow at the same rate as future dividends?

e. What would be the PER if, (i) k = 14, g = 12; (ii) k = 15, g = 11 and next year’s dividend and earnings are the same as calculated in (d) and (f) and the payout ratio is the same for all future years?

f. If you assumed for the sake of simplicity that all the long-term debt in the balance sheet is a debenture issued six years ago which is due for redemption three years from now at of £100, what is the weighted average for this firm?

Other information

The debenture pays a of 9 per cent on The coupons are payable annually – the next is due in 12 months.

– The debenture is currently trading at 105.50.

– The balance sheet shows the nominal value, not the market value.

– Tax is payable at 30 per cent (relevant to question (h) only).

– Use the capitalization figure given in b for the equity weight.

– You can ignore short-term debt.


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