1* Lanes plc, the retail butchers, is considering the purchase of ten shops from Roberts plc, the…

1* Lanes plc, the
retail butchers, is considering the purchase of ten shops from Roberts plc, the
conglomerate. The information gathered on the ten shops trading as a separate
subsidiary company is as follows:

If the shops remain part of Roberts the earnings
growth is expected to continue at the average historical rate to infinity.

The rate of return required on a business of this
risk class is 13 per cent per annum.

a Calculate the value of the shops to Roberts
shareholders.

b Lanes management believe that the ten shops will
be a perfect fit with their own. There are no

1* Lanes plc, the
retail butchers, is considering the purchase of ten shops from Roberts plc, the
conglomerate. The information gathered on the ten shops trading as a separate
subsidiary company is as follows:

If the shops remain part of Roberts the earnings
growth is expected to continue at the average historical rate to infinity.

The rate of return required on a business of this
risk class is 13 per cent per annum.

a Calculate the value of the shops to Roberts
shareholders.

b Lanes management believe that the ten shops will
be a perfect fit with their own. There are no towns in which

they both trade, and economies of scale can be
obtained. Suppliers will grant quantity discounts which will save

1m per annum. Combined transportation costs will
fall by 200,000 per year and administration costs can be

cut by 150,000 per year. These savings will remain
constant for all future years. In addition, the distribution

depot used by the ten shops could be closed and sold
for 1.8m with no adverse impact on trading. Calculate the

value of the ten shops to Lanes shareholders on the
assumption that the required return remains at 13 per cent

and underlying growth continues at its historic rate.

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