• March 9th, 2016

Financial management 2( Share & Company Valuation)

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                                      Financial management 2

 

Question

Avalon Equity is considering making an offer for Air Tor. Air Tor is a highly successful airline which has grown rapidly over the last ten years. They have just paid a dividend of €0.50. The company has 100m shares in issue. Avalon is considering an offer for Air TOR under a number of scenarios:

Scenario 1

Air Tor has reached steady state and will not grow any further.

Scenario 2

Air Tor still has room to grow and it is expected that profits and dividends will grow at a rate of 8% per annum.

Scenario 3

Air Tor has reached its full potential and will decline by 3% per annum.

Scenario 4

Air Tor has a number of major projects in the pipeline and will see earnings and dividends grow by 15% per annum for the next 5 years before growth settles down to  a steady increase of 7% per annum.

Scenario 5

The price earnings ratio for companies such as AIR TOR is 8.5 and AIR TOR currently pays out half its earnings as dividends.

Required

  • Calculate possible values for AIR Tor under each of the five scenarios. Avalon’s cost of capital is 15%. (20 Marks)
  • What should Avalon offer for Air Tor? What other considerations need to be taken into account? (10 marks

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