- 20 Marks
Question
Kumasi Agro-Processing Ltd (Kumasi Agro) is a privately-owned Ghanaian company specialising in the processing and export of cocoa products. The company has been operating for 15 years and has built a strong reputation for quality and reliability in international markets.
The directors are considering selling the company to a larger multinational corporation interested in vertical integration. The prospective buyer has requested a valuation of the company to guide negotiations.
The following financial information is available:
- Profit after tax for the most recent year: GH¢45 million
- Expected growth in profits: 5% per annum indefinitely
- Current dividend payout ratio: 40%
- Required rate of return by equity investors: 12%
- Net assets at book value: GH¢280 million
- Replacement cost of net assets: GH¢350 million
- Average P/E ratio for similar listed companies in the sector: 10
- Free cash flow to equity in the most recent year: GH¢38 million
Required: a) Calculate the value of Kumasi Agro using EACH of the following methods:
i) Net asset value (book value and replacement cost) (4 marks)
ii) Dividend valuation model (4 marks)
iii) Earnings-based valuation using P/E ratio (4 marks)
iv) Free cash flow to equity valuation (assuming constant growth) (4 marks)
b) Explain FOUR factors that could cause the final negotiated price to be higher than the values calculated in (a) above. (4 marks)
(Total: 20 marks)
Answer
a) i) Net asset value
- Book value = GH¢280 million
- Replacement cost = GH¢350 million
(2 marks each = 4 marks)
ii) Dividend valuation model Dividend next year = 45m × 40% × 1.05 = GH¢18.9m Value = 18.9 / (0.12 – 0.05) = GH¢270 million
(4 marks)
iii) Earnings-based valuation (P/E) Maintainable earnings = GH¢45m × 1.05 = GH¢47.25m Value = 47.25 × 10 = GH¢472.5 million
(4 marks)
iv) Free cash flow to equity valuation FCFE next year = 38m × 1.05 = GH¢39.9m Value = 39.9 / (0.12 – 0.05) = GH¢570 million
(4 marks)
b) Factors causing higher negotiated price
- Synergies – The buyer may achieve cost savings, revenue enhancements or strategic advantages (e.g. supply chain control, market access) not available to the company as a standalone entity.
- Control premium – Acquiring 100% gives the buyer full control over strategy, operations and cash flows, justifying a premium over minority share values or standalone valuations.
- Scarcity/strategic value – The company may possess unique assets, contracts, licences, brand reputation or market position that are difficult to replicate, increasing perceived value to the specific buyer.
- Market conditions and bargaining power – Favourable cocoa price outlook, limited number of quality targets in the sector, or urgency on the buyer’s side can drive the price upward during negotiations.
(Any four relevant points well explained @ 1 mark each = 4 marks)
- Topic: Business valuations
- Series: NOV 2025
- Uploader: Samuel Duah