Financial management 2
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:
Air Tor has reached steady state and will not grow any further.
Air Tor still has room to grow and it is expected that profits and dividends will grow at a rate of 8% per annum.
Air Tor has reached its full potential and will decline by 3% per annum.
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.
The price earnings ratio for companies such as AIR TOR is 8.5 and AIR TOR currently pays out half its earnings as dividends.
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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