Thursday 5 June 2008
Section A – BOTH questions are compulsory and MUST be attempted
1 Mercury Training was established in 1999 and since that time it has developed rapidly. The directors are considering
either a flotation or an outright sale of the company.
The company provides training for companies in the computer and telecommunications sectors. It offers a variety of
courses ranging from short intensive courses in office software to high level risk management courses using advanced
modelling techniques. Mercury employs a number of in-house experts who provide technical materials and other
support for the teams that service individual client requirements. In recent years, Mercury has diversified into the
financial services sector and now also provides computer simulation systems to companies for valuing acquisitions.
This business now accounts for one third of the company’s total revenue.
Mercury currently has 10 million, 50c shares in issue. Jupiter is one of the few competitors in Mercury’s line of
business. However, Jupiter is only involved in the training business. Jupiter is listed on a small company investment
market and has an estimated beta of 1·5. Jupiter has 50 million shares in issue with a market price of 580c. The
average beta for the financial services sector is 0·9. Average market gearing (debt to total market value) in the financial
services sector is estimated at 25%.
Other summary statistics for both companies for the year ended 31 December 2007 are as follows:
Net assets at book value ($million) 65 45
Earnings per share (c) 100 50
Dividend per share (c) 25 25
Gearing (debt to total market value) 30% 12%
Five year historic earnings growth (annual) 12% 8%
Analysts forecast revenue growth in the training side of Mercury’s business to be 6% per annum, but the financial
services sector is expected to grow at just 4%.
2 Venus Systems, a publicly quoted company, is a specialist manufacturer of mechanical control units for both the
defence and civil aviation industries. Its principal customers are the defence procurement agencies of a number of
western governments and European Aerospace Co, an aeroplane manufacturer. Over recent years the company has
suffered a collapse in profitability and has attempted to respond by reducing its defence related business and focusing
on its civil aviation business.
On the civil side, long delays at European Aerospace Co in the development of a new large-bodied passenger
aeroplane, the European Aircoach, have severely impacted upon suppliers such as Venus Systems. As a result Venus’s
share price has declined over the last three years, in line with movements in the sector index. However, market
valuations have not followed the general decline in earnings across the sector. Market analysts attribute this to the
high level of advance orders by airlines for the Aircoach and the confident expectation that full production will
commence in mid 2009.
Orders for defence components have fallen rapidly over the last three years and the company has taken the decision
to scale down its defence division and switch production resources to the civil side of the business. Wherever possible
the company has redeployed and retrained its workforce. Indeed, its commitment to its workforce has helped maintain
good industrial relations and the redeployment has been successfully matched against its natural labour turnover in
the civil division.