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Question: Accona plc operates a successful chain of


Accona plc operates a successful chain of furniture retail stores. For the year that has just ended, the business reported after-tax profits of £250 million. It has 200 million £0.50 shares in issue and has a P/E ratio of 7.8 times.
Some years ago, in an effort to boost sales, the business created a subsidiary business, Tenere plc, to offer hire-purchase facilities to customers wishing to buy its more expensive furniture items. The subsidiary has grown steadily and now offers hire purchase facilities to customers of other retailers as well as to Accona plc customers.
For the year that has just ended, the subsidiary contributed £30 million of the total aftertax profits of Accona plc. Accona plc is now considering a demerger and a separate Stock Exchange listing for the subsidiary. The financial advisers of Accona plc have suggested that Tenere plc should be floated with a share capital of 40 million £0.50 ordinary shares and that the shareholders of Accona plc should receive one share in Tenere plc for every 5 shares held.
The financial advisers expect that the P/E ratio of the newly-listed business will be somewhere between 12 and 14 times. The P/E ratio of Accona plc is expected to reduce to 7.0 times as a result of the demerger.
Ignore taxation.

Required:
Calculate the likely effect of the demerger on the wealth of a shareholder holding 5,000 ordinary shares in Accona plc, assuming that the P/E ratio of Tenere plc will be:
(i) at the lower end, and
(ii) at the higher end
of the financial advisers’ expectations and comment on your findings.


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