- 20 Marks
Question
a) Gogomi LTD, a privately owned joint venture, produces a range of equipment for the oil and gas industry in Ghana. One of the venturers, Oman Pension Funds (OPF), who holds one-third of Gogomi LTD’s ordinary shares, has decided to sell all of its holdings. This plan forms part of measures OPF is using to redirect focus of its investment strategy by replacing its equity assets with fixed-income holdings. OPF would therefore like to know the current value of its shareholdings to guide it during any negotiation with a potential buyer.
The following draft financial statements (together with the additional information) should be used to estimate the share value:
Draft statement of profit or loss of Gogomi LTD for the year ended 31 August 2024
| GH¢000 | |
|---|---|
| Revenue | 115,500 |
| Cost of sales | (80,300) |
| Gross profit | 35,200 |
| Selling and distribution | (12,300) |
| Administrative expenses | (8,550) |
| Profit before tax | 14,350 |
| Tax | (2,030) |
| Profit after tax | 12,320 |
Draft statement of financial position of Gogomi LTD as at 31 August 2024
| GH¢000 | |
|---|---|
| Assets | |
| Non-current assets: | |
| Properties | 52,400 |
| Plant and equipment | 53,300 |
| Current assets | 35,300 |
| Total assets | 141,000 |
| Equity and liabilities | |
| Capital and reserves | |
| Ordinary shares @ GH¢2 each | 24,000 |
| 10% Irredeemable preference shares @ GH¢1.50 each | 6,000 |
| Retained earnings | 57,500 |
| Non-current liabilities | 38,080 |
| Current liabilities | 15,420 |
| Total equity and liabilities | 141,000 |
Additional information:
- Included in properties is an office building whose fair value has been measured by a valuation specialist at GH¢25 million. This value compares to a book value of GH¢19.5 million. Plant is not yet adjusted for a required reversal of GH¢2 million impairment charge previously written off to profit or loss account against an item of plant. On 28 August 2024, Gogomi LTD bought an item of equipment and paid GH¢15.2 million, net of 5% withholding tax, to the equipment dealer. Management have expensed the associated withholding tax (already paid to the local tax office) within the income statement.
- Included in receivables is an amount of GH¢4.4 million owed by a customer who has fallen into an unexpected, serious financial difficulty. As a consequence, expert assessment indicates that Gogomi LTD will have to wait until 31 August 2025 to receive the full amount in a single payment.
- Gogomi LTD’s current ordinary dividend cover computed, based on the above draft accounts, is 4. Preference dividends have been fully paid.
- A comparable quoted firm’s price-earnings ratio and dividend yield are 7.2 and 4.52% respectively. No adjustment should be made to these ratios, if they are used in any computations.
- Applicable cost of capital is 10%.
Required:
Determine a range of values to be placed on each ordinary share of Gogomi LTD using:
i) Net assets basis
ii) Price-earnings basis
iii) Dividend yield basis
b) For the purpose of consolidation, a parent must consolidate all controlled entities. However, there is an exemption that applies to investment entities.
Answer
a) i) Net asset basis
Net asset basis value per share
= [Total assets – total liabilities (preference share capital)] divided by number of ordinary shares issued
Revision of statement of financial position
| GH¢000 | |
|---|---|
| Properties (52,400 + (25,000 – 19,500)) | 57,900 |
| Plant and equipment (53,300 + 2000 + (5/95 × 15,200)) | 56,100 |
| Current assets (35,300 + (4,400/1.1) – 4,400) | 34,900 |
| Total assets | 148,900 |
| Current liabilities | (15,420) |
| Non-current liabilities | (38,080) |
| Net assets attributable to all shareholders | 95,400 |
| Less: Preference shares | (6,000) |
| Net assets attributable to ordinary shares | 89,400 |
Net assets value per share = GH¢89,400,000 / (24,000,000 / 2)
= GH¢7.45
ii) Price-earnings basis
Value per share
= Earnings per share of Gogomi x adjusted price/earnings of a similar quoted firm
Earnings per share
= (PAT – preference dividends) / number of issued ordinary shares
= GH¢14,120,000 (see below) / 12,000,000
= GH¢1.18
Value per share
= GH¢1.18 × 7.2
= GH¢8.5
Revision of profit after tax
| GH¢000 | |
|---|---|
| Profit after tax (as given) | 12,320 |
| Adjustments: | |
| Impairment reversal | 2,000 |
| Withholding tax (5/95 × 15,200) | 800 |
| Credit loss ((4,400/1.1) – 4,000) | (400) |
| Revised profit | 14,720 |
| Less: Preference dividend (10% × 6,000) | (600) |
| Earnings attributable to ordinary shares | 14,120 |
iii) Dividend yield basis
Value per share
= DPS of Gogomi / Dividend yield of the similar quoted firm
DPS
= Ordinary dividends / number of ordinary shares
Ordinary dividends
= (Profit after tax of Gogomi (unadjusted) – Preference dividends) / Dividend cover
= (GH¢12,320,000 – GH¢600,000) / 4
= GH¢2,930,000
DPS
= GH¢2,930,000 / 12,000,000
= GH¢0.2442
Value per share
= GH¢0.2442 / 0.452
= GH¢5.40
Range of values per share
Thus, the value to be placed on each ordinary share ranges from GH¢5.40 to GH¢8.5.
(50 ticks @ 0.3 each for 15 marks)
EXAMINER’S COMMENTS
The first part of the question was a straightforward one which required demonstration of an understanding of business valuation. The question was well attempted by almost all candidates. Candidates had knowledge of the formulae to use to compute the value per share under each method and stated them clearly. They however could not adjust the earnings correctly. They had a challenge computing the revised profit after tax. Candidates also had a challenge of computing the ordinary dividends.
b) Characteristics of an investment entity
An investment entity has the following typical characteristics:
- It has more than one investment
- It has more than one investor
- It has investors that are not related parties of the entity
- It has ownership interests in the form of equity or similar interests
A parent must determine whether it meets the investment entity definition by considering whether it demonstrates the above characteristics. However, the absence of any of the typical characteristics may not necessarily disqualify an entity from being classified as an investment entity. Each case should be judged on its merit.
(5 marks)
EXAMINER’S COMMENTS
The second part of the question on typical characteristics of an investment entity was poorly answered by almost all candidates. Only exceptional candidates were able to answer correctly.
- Tags: Consolidation, Financial Reporting, IFRS 10, Investment Entities
- Level: Level 3
- Topic: Consolidated Financial Statements (IFRS 10)
- Series: MAR 2025
- Uploader: Samuel Duah