BUSF_A01.qxd

Valuation

The following points should be noted on using the dividend yield approach in

practice:

l The difficulty of finding a listed business sufficiently like the unlisted one in the

ways mentioned for the comparison to be valid.

l The doubts as to whether it is valid to assume that current dividend levels are the

sole determinant of share values.

l The fact that prices should logically relate only to future dividends. Past dividends

will tend only to be useful as a guide to the future.

l The lack of marketability of unlisted shares: this will tend to make them less valu-

able than apparently identical listed ones.

In practice, this approach tends to be used where a minority holding is being val-

ued. This is because the minority shareholder has little control over events, and sim-

ply receives a dividend.

Price/earnings

The price/earnings approach is similar to the dividend yield approach but concen-

trates on earnings rather than dividends, and takes the view that the shares of two

similar businesses will have the same P/E ratio.

A plc and B Ltd are two businesses similar in size, activity, gearing and dividend cover. A plc

is Stock Exchange listed, B Ltd is not. The dividend yield (gross) for A plc is 10 per cent,

and B Ltd has recently paid annual dividends of £0.15 per share. What is the value of each

B Ltd share?

Example 16.1

Bearing in mind that:

Dividend yield =

then, assuming an income tax rate of 10 per cent:

10% =

where pB is the price of one share in B Ltd. This gives:

pB=£1.67 per share

0.15 × 100/90

pB

Dividend paid (grossed up)

Current market price per share

Solution

C plc and D Ltd are two businesses similar in size, activity and gearing. C plc is listed, D Ltd

is not. The P/E ratio for C plc is 12; the after-tax earnings per share for D Ltd have been £0.30

p.a. over recent years. What is the value of each D Ltd share?

Example 16.2