Chapter 16 • Small businesses
16.1 What recent business trend is tending to promote the establishment and expansion
of small, specialist businesses?
16.2 Why would it normally be appropriate for a small business to discount project cash
flows at a higher rate than might be applied to a similar prospective project under con-
sideration by a larger business?
16.3 When valuing unlisted shares, what problems arise when basing the valuation on the
price/earnings ratio and/or dividend yield of a similar listed business?
16.4 What is wrong with using the balance sheet values of assets and claims when deduc-
ing the value of the shares of a small business?
16.5 What particular problem will face potential equity investors in small businesses, which
may make the investors hesitant to buy shares and/or to seek higher expected returns
than they would normally seek from a larger, stock market listed one?
16.6 Why would dividend policy tend to be easier to decide for the typical small business
than for the typical large one?REVIEW QUESTIONS
Suggested answers to
review questions appear
in Appendix 3.(Problems 16.1 and 16.2 are basic-level problems, whereas problems 16.3 to 16.6 are
more advanced and may contain some practical complications.)16.1*Tiny Tim Ltd, an unlisted business, is quite like Mega plc, a listed one, in terms of
activities and gearing. Tiny Tim Ltd has steady after-tax profits of £350,000 a year.
Mega plc’s published price/earnings ratio is 16.
Estimate the total value of the shares in Tiny Tim Ltd, bearing in mind its unlisted and
private company status.16.2*XYZ Ltd, an unlisted business, is quite like ABC plc, a listed one, in term of activities,
gearing and dividend policy. XYZ Ltd recently paid a dividend for the year of £0.20 per
share. The effective income tax rate is 10 per cent. ABC plc’s gross dividend yield is
12 per cent.
Estimate the value of a share in XYZ Ltd, bearing in mind its unlisted and private com-
pany status.16.3*PR Industries plc, a major listed conglomerate, is considering acquiring an interest in
Howard Pope Ltd, an unlisted business that has been trading for about 40 years as a
manufacturer of domestic appliances.
The latest available summarised balance sheet of Howard Pope Ltd is as follows:PROBLEMS
Sample answers to
problems marked with
an asterisk appear in
Appendix 4.