Past five years’ dividend payments…………………15p, 17p, 18p, 21p, 23p — Restwell plc hotel and leisure company planning take over smaller private limited

Restwell plc, a hotel and leisure company, is planning to take over a smaller private limited company, Staygood Ltd, and needs to place a value on the company. Restwell has gathered the following data:

Restwell

Weighted average cost of capital………………………………………...12%

Price/earnings ratio………………………………………………………...12

Shareholders’ cost of equity…………………………………………….15%

Staygood

Current dividend payment………………………………………………..27p

Past five years’ dividend payments…………………15p, 17p, 18p, 21p, 23p

Current EPS………………………………………………………………37p

Number of ordinary shares in issue………………………………………5m

It is estimated that the cost of equity of Staygood is 20 per cent higher (in relative terms) than the cost of equity of Restwell, owing to the higher risk of Staygood’s operations.

Restwell estimates that cash flows at the end of the first year will be £2.5m and these will grow at an annual rate of 5 per cent. Restwell also expects to raise £5m in two years’ time by selling off hotels of Staygood that are surplus to its needs.