MC Question 20
Par Co currently has the following long-term capital structure:
| $m | $m | |
|---|---|---|
| Equity finance | ||
| Ordinary shares | 30·0 | |
| Reserves | 38·4 | |
| 68·4 | ||
| Non-current liabilities | ||
| Bank loans | 15·0 | |
| 8% convertible loan notes | 40·0 | |
| 5% redeemable preference shares | 15·0 | |
| 70·0 | ||
| Total equity and liabilities | 138·4 |
The 8% loan notes are convertible into eight ordinary shares per loan note in seven years’ time. If not converted, the loan notes can be redeemed on the same future date at their nominal value of $100. Par Co has a cost of debt of 9% per year.
The ordinary shares of Par Co have a nominal value of $1 per share. The current ex dividend share price of the company is $10·90 per share and share prices are expected to grow by 6% per year for the foreseeable future. The equity beta of Par Co is 1·2.
The loan notes are secured on non-current assets of Par Co and the bank loan is secured by a floating charge on the current assets of the company.
Which of the following statements are problems in using the price/earnings ratio method to value a company?
(1) It is the reciprocal of the earnings yield
(2) It combines stock market information and corporate information
(3) It is difficult to select a suitable price/earnings ratio
(4) The ratio is more suited to valuing the shares of listed companies
A. 1 and 2 only
B. 3 and 4 only
C. 1, 3 and 4 only
D. 1, 2, 3 and 4