Page 251 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Business valuation

Example 6

Chassagne Co is considering making a bid for Butler Co, a rival company.

The following information should be used to value Butler Co.

Statement of profit or loss for the most recent accounting period

GBPm
Revenue 285.1
Cost of sales (120.9)
–––––
Gross profit 164.2
Operating expenses (inc depreciation GBP 12.3m) (66.9)
–––––
Profit from operations 97.3
Finance costs (10.0)
–––––
Profit before tax 87.3
Taxation (21.6)
–––––
Profit after tax 65.7
–––––
Other information:

 selling prices are expected to rise at 3% per year for the next 3 years and
then stay constant thereafter.

 sales volumes are expected to rise at 5% per year for the next 3 years
and then stay constant thereafter.

 assume that cost of sales is a completely variable cost, and that other
operating expenses (including depreciation) are expected to stay
constant.

 Butler Co invested GBP 15m in non-current assets and GBP 2m in
working capital last year. These annual amounts are expected to stay
constant in future.

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