Question Tag: Business Valuation

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FM – Nov 2024 – L2 – Q4a – Business Valuation

Valuing a company using the discounted cash flow model and price multiples.

Question

Djokoto PLC (Djokoto) has 12 million ordinary shares outstanding and no other long-term debt. The Finance Director of Djokoto, Adepa, estimates that Djokoto’s free cash flows at the end of the next three years will be GH¢0.5 million, GH¢0.6 million, and GH¢0.7 million, respectively. After Year 3, the free cash flow will grow at 5% yearly forever. The appropriate discount rate for this free cash flow stream is determined to be 15% annually.

In a separate analysis based on ratios, Adepa estimates that Djokoto will be worth 10 times its Year 3 free cash flow at the end of the third year. Adepa gathered data on two companies comparable to Djokoto: Mesewa and Dunsin. It is believed that these companies’ price-to-earnings, price-to-sales, and price-to-book-value per share should be used to value Djokoto.

The relevant data for the three companies are given in the table below:

Variables	Mesewa	Dunsin	Djokoto
Current Price Per Share	7.20	4.50	2.40
Earnings Per Share	0.20	0.15	0.10
Revenue Per Share	3.20	2.25	1.60
Book Value Per Share	1.80	1.00	0.80

Required:
i) Estimate Djokoto’s fair value based on the discounted cash flows model. (5 marks)
ii) Compute the following ratios for the comparable companies:

P/E Ratio (2 marks)
Price-to-Sales Ratio (2 marks)
Price-to-Book-Value Ratio (2 marks)
iii) Based on the valuation results, discuss whether an investor should buy, sell, or hold Djokoto shares. Justify your recommendation. (4 marks)
iii) Identify two advantages and two disadvantages of business combinations.

Answer

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Tags: Business Valuation, Discounted Cash Flow, Financial Modelling, Price-Earnings ratio, Price-to-Book Ratio, Price-to-Sales Ratio
Level: Level 2

Topic: Business valuations
Series: Nov 2024

FM – May 2022 – L3 – Q1 – Business Valuation Techniques

Estimate VT's valuation using FCFE, CAPM, and terminal value assumptions for three-year cash flow forecasts.

Question

Vico Tony (VT) is a software design company established six years ago. The company is owned by five directors. Since establishment, the company has developed rapidly. VT finds it difficult to obtain bank finance and relies on a long-term strategy of using internally generated funds to finance expansion. The directors are therefore giving consideration to the possibility of floating the company on the stock market. As a first step, you have been appointed by the directors to advise on the current value of the business under their ownership.

The company’s most recent statement of profit or loss and the extracted balances from the latest statement of financial position are as follows:

During the current year:

Depreciation is charged at 10% per annum on the year-end non-current assets balance before accumulated depreciation, and is included in other operating costs in the statement of profit or loss.
The investment in net working capital is expected to increase in line with the growth in gross profit.
Other operating costs consisted of:

Sales and variable costs are projected to grow at 9% per annum and fixed costs are projected to grow at 6% per annum.
The company pays interest on its outstanding loan of 7.5% per annum and incurs tax on its profits at 30%, payable in the following year. The company does not currently pay dividends.

One of your first tasks is to prepare for the directors a forward cash flow projection for three years and to value the firm on the basis of its expected free cash flow to equity. In discussion with them, you note the following:

The company will not dispose of any of its non-current assets but will increase its investment in new non-current assets by 20% per annum. The company’s depreciation policy matches the currently available tax allowable depreciation. This straight-line write-off policy is not likely to change;
The directors will not take a dividend for the next three years but will then review the position taking into account the company’s sustainable cash flow at that time;
The level of loan will be maintained at ₦1.98 billion and interest rates are not expected to change.
For estimating the appropriate required return on equity, it is decided to make use of the capital asset pricing model (CAPM). The challenge, however, is that since the company is not quoted, an appropriate beta factor does not exist. You have found a listed company, Konputer Limited (KL) that is into software development. KL is also into computer hardware retailing. It has the following financial statistics:

About 60% of the market value of KL is attributed to the software development division, while 40% of the value is attributed to computer hardware retailing. The computer hardware retailing division has an equity beta of 0.8.
Risk-free rate is 4% and the market risk premium is 8%.
VT has maintained a long-term debt/(debt+equity) ratio of 20%.

Required:

a. Provide an estimate of the appropriate rate of return to be used for the valuation of VT. Round your answer to the nearest whole number. (7 Marks)
b. Prepare a three-year cash flow forecast for the business on the basis described above highlighting the free cash flow to equity in each year. (14 Marks)
c. Estimate the value of the business based on the expected free cash flow to equity and a terminal value based on a sustainable growth rate of 4% per annum thereafter. (Note: Irrespective of your answer in (a), assume required return of 17%). (5 Marks)
d. Advise the directors on the assumptions and the uncertainties within your valuation. (4 Marks)

Answer

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Tags: Business Valuation, CAPM, Financial Projections, Free Cash Flow to Equity
Level: Level 3

Topic: Business Valuation Techniques

FM – May 2024 – L3 – SA – Q1 – Business Valuation Techniques

Evaluate the potential acquisition of Kenny Ltd (KL) by Bolade Plc, calculating share value using various valuation methods, assessing these methods, and outlining merger benefits.

Question

You are employed by Bolade Plc (BP), a very large printing firm with retail outlets across Nigeria. Its board is considering making an offer to buy 100% of the shares of Kenny Ltd (KL), a competitor of Bolade in Aba. KL’s financial year-end is 28 February, and its most recent financial statements are summarised below:

KL Income Statement for the Year Ended 28 February 2023

Item	₦m
Revenue	17.3
Profit before interest and tax	5.9
Interest	(0.3)
Profit before taxation	5.6
Tax at 21%	(1.2)
Profit after taxation	4.4
Dividends declared	1.1

KL Statement of Financial Position at 28 February 2023

Item	₦m
Non-current assets:
Freehold land and buildings (original cost ₦4.1m)	3.5
Machinery (original cost ₦8.8m)	5.3
Total Non-current assets	8.8
Current assets:
Inventories	3.0
Receivables	0.5
Cash and bank	2.8
Total Current assets	6.3
Current liabilities:
Trade payables	3.5
Dividends	1.1
Taxation	1.2
Total Current liabilities	(5.8)
Net Current assets	0.5
Net assets	9.3
Non-current liabilities:
10% bonds (redeemable 2031)	(3.0)
Net assets after non-current liabilities	6.3
Equity:
Ordinary shares of ₦1 each	2.1
Retained earnings	4.2
Total equity	6.3

Additional Information:

KL’s management had some of the company’s assets independently revalued in January 2023. Those values are shown below:

Asset	₦m
Freehold land and building	8.3
Machinery	4.1
Inventories	3.1

The average price/earnings ratio for listed businesses in the printing industry is 9, and the average dividend yield is 6% p.a.
The cost of equity of businesses in the printing industry, taking account of the industry average level of capital gearing, is 14% p.a.

KL’s finance department has estimated that the company’s pre-tax net cash inflows (after interest) for the next four trading years ending 28 February, before taking account of capital allowances, will be:

Year to	₦m
2024	4.6
2025	4.3
2026	5.2
2027	5.7

KL’s existing equipment has a tax written-down value of ₦3.6 million at 28 February 2023. The equipment attracts 18% (reducing balance) tax allowances in every year of ownership by the company, except the final year.

You should assume that KL will not be purchasing or disposing of any machinery in the years 2024-2027 and that it would dispose of the existing equipment on 28 February 2027 at its tax written-down value.

Bolade’s board estimates that in four years’ time, i.e., 28 February 2027, it could, if necessary, dispose of KL for an amount equal to four times its after-tax cash flow (ignoring the effects of capital allowances and the disposal value of the equipment) for the year to 28 February 2027.

Assume that the company income tax rate is 21% p.a.

Required:

Using the information provided, prepare a report for Bolade’s board by:

a. Calculating the value of one share in KL based on each of the following methods:

i. Net asset basis (historic cost)
ii. Net asset basis (revalued)
iii. Price/earnings ratio
iv. Dividend yield
v. Present value of future cash flows
(16 Marks)

b. Explain the advantages and disadvantages of using each of the five valuation methods in (a).
(8 Marks)

c. What are the possible benefits from the merger between Bolade Plc (BP) and Kenny Limited (KL).
(6 Marks)

(Total: 30 Marks)

Answer

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Tags: Acquisition, Business Valuation, Mergers, Synergy, Valuation Methods
Level: Level 3

Topic: Business Valuation Techniques
Series: MAY 2024

PM – Nov 2019 – L2 – Q1a – Decision-Making Techniques

Analyze business decision on factory closure by comparing sales volume, advertising costs, and other production costs for two proposals.

Question

Adeco Nigeria plc. is a large and diversified company with several factories. One of its factories that produces “Apet” has not been able to meet its sales target for over two years. The board has mandated the company’s management to take an urgent decision on what to do with the factory.

The management has therefore set up a committee of three, the factory manager, the marketing manager, and the management accountant to analyze the situation and come up with a report on what they felt the management should do. The marketing manager has submitted two proposals to the committee. These are:

A sales volume of 25,000 units can be achieved with a selling price of N13.50 per unit and an advertising campaign of N37,500; or
A sales volume of 35,000 units can be achieved at a selling price of N11.25 with an advertising campaign costing N52,500.

The management accountant is to work on these proposals with the information provided by the factory manager and show with calculations that will help the committee determine which proposal to be recommended to management. The management accountant is also to provide a third option, the closure of the factory.

The factory manager has submitted the following information to the management accountant:

The following additional information has also been made available:
(i) There are 50,000 kg of material A in inventory. This originally cost N1.5 per
kg. Material A has no other use and unless it is used by the division, it will
have to be disposed of at a cost of N750 for every 5,000 kg.
(ii) There are 30,000 litres of material B in inventory. Any unused material can be
used by another department to substitute for an equivalent amount of a
material, which currently costs N1.875 per litre. The original cost of material B
was N0.75 per litre and it can be replaced at a cost of N2.25 per litre.
(iii) All production labour hours are paid on an hourly basis. Rumours of the
closure of the department have led to a large proportion of the department‟s
employees leaving the organisation. Uncertainty over its closure has also
resulted in management not replacing these employees. The department is
therefore, short of labour hours and has sufficient to produce only 25,000
units. Output in excess of 25,000 units would require the department to hire
contract labour at a cost of N5.625 per hour. If the department is shut down
the present labour force will be redeployed within the organisation.
(iv) Included in the variable overhead is the depreciation of the only machine
used in the department. The original cost of the machine was N300,000 and it
is estimated to have a life of 10 years. Depreciation is calculated on a straightline basis. The machine has a current resale value of N37,500. If the
machinery is used for production, it is estimated that the resale value of the
machinery will fall at the rate of N150 per 1,000 units produced. All other
costs included in variable overhead vary with the number of units produced.
(v) Included in the fixed production overhead is the salary of the factory manager
which amounts to N30,000. If the department were to shut down the manager
would be made redundant with a redundancy pay of N37,500. All other costs
included in the fixed production overhead are general factory overheads and
will not be affected by any decision concerning the factory.
(vi) The non-production cost charged to the factory is an apportionment of the
total non-production costs incurred by the factory.
The committee will be meeting in a week‟s time to prepare its report to
management on the line of action management should follow, either one of the
marketing manager‟s proposals or to close down the factory.
63
Required:

As the management accountant of Adeco plc., you are to:
a. Prepare detailed calculations to support the committee‟s recommendation to
the management whether to:
i. reduce production to 25,000 units
ii. reduce production to 35,000 units
iii. shut down the factory. (20 Marks)

Answer

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Tags: Business Valuation, Factory Closure, Production Cost, Relevant Costs, Sales Volume
Level: Level 2

Topic: Decision-making techniques
Series: NOV 2019

CR – Nov 2020 – L3 – Q4a – Business Valuation

Determine share value of Anidaso Ltd using multiple valuation methods including net assets, P/E ratio, dividend yield, and discounted cash flow.

Question

Anidaso Ltd operates in the manufacturing industry in Ghana. The company is in the process of selling some of its shares to the general public to raise funds to expand its operations. Below are the financial statements of the company:

Statement of profit or loss for the year ended 30 September, 2019

	GH¢’000
Revenue	122,900
Cost of sales	(58,650)
Gross profit	64,250
Selling, general & administration expenses	(43,570)
Profit before interest & taxes	20,680
Finance cost	(1,680)
Profit before taxation	19,000
Taxation @ 20%	(4,750)
Profit after tax	14,250

Statement of changes in equity (extracts) for the year ended 30 September, 2019

	GH¢’000
Retained Earnings at October 1, 2018	47,970
Profit for the year	14,250
Dividend paid	(6,200)
Retained Earnings at 30 September, 2019	56,020

Statement of Financial Position as at 30 September, 2019

	GH¢’000	GH¢’000
Non-current assets
Development expenditure	13,050
Patents	8,200
Property, plant, and equipment	98,750	120,000
Current assets
Inventories	21,700
Trade receivables	12,501
Bank and cash	5,944	40,145
Current liabilities
Trade payables	(15,400)	24,745
Net current assets	144,745
Non-current liabilities
10% Debenture loan stock	(12,000)	132,745
Equity
Share capital	50,000
Revaluation Surplus	26,725
Retained Earnings	56,020	132,745

Additional relevant information:

The share capital of the company is composed of:
- GH¢000
- 20% redeemable preference shares 10,000
- Ordinary shares (issued @GH¢0.20 each) 40,000
- Total share capital: 50,000
A review of the development expenditure indicated that only 50% of it is worthwhile.
An independent valuer has placed values on some of the assets of Anidaso Ltd below:
- Property, plant & equipment: GH¢111,000
- Inventories: GH¢16,200
- Trade receivables: GH¢10,000
- Total value: GH¢137,200
Profit forecasts for the next five years of Anidaso Ltd are as follows:

Year-end 30 September Profit before Tax (GH¢’000) Depreciation Charge (GH¢’000)

2020 14,900 1,100

2021 16,000 1,225

2022 19,250 1,550

2023 19,800 2,025

2024 21,550 2,130
The patents in the statement of financial position represent a license to produce an improved variety of a product and is expected to generate a pre-tax profit of GH¢10,000 per year for the next five years.
Abiola Limited is a competitor company listed on the Ghana Stock Exchange, and data extracted from its recently published financial statements revealed the following details:
- Market capitalization: GH¢1,000,000
- Number of ordinary shares: 800,000
- Earnings per share: GH¢0.20
- Dividend payout ratio: 80%
The cost of capital of Anidaso Ltd is 10%.

Year-end 30 September	Profit before Tax (GH¢’000)	Depreciation Charge (GH¢’000)
2020	14,900	1,100
2021	16,000	1,225
2022	19,250	1,550
2023	19,800	2,025
2024	21,550	2,130

Required:
Determine the value to be placed on each share of Anidaso Ltd using the following methods of valuation: i) Net assets
ii) Price-earnings ratio
iii) Dividend yield
iv) Discounted cash flow

Answer

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Tags: Business Valuation, Discounted Cash Flow, Dividend Yield, Net Asset Valuation, Price-Earnings ratio, Share Valuation
Level: Level 3

Topic: Business valuations
Series: NOV 2020

SCS – Aug 2022 – L3 – Q5 – Financial Management

Prepare Little Bee’s financial forecast and calculate its gearing ratios, explaining their significance to Bazar.

Question

Using the additional information presented by AB Consult & Associate to the Director of Finance and Operations, Mrs. Emma Owusu-Kwakye, on 4 August, prepare the following:

i) Little Bee new forecasted Statement of financial performance after the changes that will be discussed at the board meeting on the 5 August 2022. (4 marks)
ii) Calculate the operating gearing, measured as the ratio of the percentage increase in profit before interest and tax divided by the percentage increase in sales. (2 marks)
iii) Calculate the financial gearing, measured as the ratio of the percentage change in total earnings (or EPS) to the percentage increase in profit before interest and tax. (2 marks)
iv) Calculate the Combined gearing, measured as the ratio of the percentage change in total earnings (or EPS) to the percentage increase in sales. (2 marks)
v) Explain the significance of operating gearing and financial gearing to the management of Bazar. (10 marks)

Answer

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Tags: Business Valuation, Combined Gearing, Financial Forecast, Financial Gearing, Operating Gearing
Level: Level 3

Topic: Financial management
Series: AUG 2022

FA – May 2024 – L1 – SA – Q6 – Intangible Assets and Goodwill

Identifies the correct description of goodwill in financial statements.

Question

Which of the following about goodwill is true?

A. Goodwill is always recognised as an intangible asset in an entity’s financial statements.
B. Goodwill represents the total value of a business’s assets and liabilities.
C. The value of a business is solely based on the value of its net assets.
D. Goodwill reflects a business’s potential to generate future profits, making it an intangible asset.
E. Successful businesses do not have goodwill as it is not considered a valuable aspect during acquisitions.

Answer

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Tags: Business Valuation, Goodwill, Intangible Assets
Level: Level 1

Topic: Intangible Assets and Goodwill
Series: MAY 2024

CR – May 2019 – L3 – Q3 – Business valuations

The question involves redrafting financial statements of PFC based on additional information provided and calculating a range of possible issue prices for an IPO using Net Assets Method and Earnings Yield/Price Earnings Ratio Method.

Question

The Board of Pogas Furniture Ltd (PFC), after a few years of incorporation, has decided to get the company listed on the Ghana Stock Exchange. The Board has contacted you to assist in determining the true value of the business as at 31 December 2018 and to provide a range of possible issue prices based on the Net Assets Method and the Earnings Yield Method. Oliso Ltd, a listed company and a competitor of PFC, current results show a price-earnings ratio of 5 and earnings yield of 20%. The summarised unaudited financial statements of PFC are as follows:

Statement of Profit or Loss for the year ended 31 December 2018

	GH¢’000
Sales Revenue (note i)	150,000
Cost of Sales	(72,000)
Gross Profit	78,000
Operational Expenses	(34,800)
Finance Costs (Interest on debenture stocks)	(1,200)
Net Profit	42,000
Taxation (@ 25%)	(10,500)
Profit for the period	31,500

Statement of Financial Position as at 31 December 2018

	GH¢’000
Non-current assets
Property at Valuation (Land GH¢3 million; buildings GH¢27 million)	30,000
Plant and Equipment	24,000
Intangible Asset – Patent Right	3,000
Financial Asset (fair valued through profit or loss at 1/1/2018)	7,500
Total Non-current Assets	64,500
Current Assets	30,000
Total Assets	94,500
Equity and Liabilities
Stated Capital (4 million shares issued at GH¢3.00 per share)	12,000
Retained Earnings	57,960
Total Equity	69,960
Non-current liabilities
20% Debenture Stocks (2018-2020)	6,000
Deferred Tax provision (1 January 2018)	4,500
Total Non-current Liabilities	10,500
Current Liabilities
Trade Payables	3,540
Current Tax liability	10,500
Total Current Liabilities	14,040
Total Equity and Liabilities	94,500

Additional Information:

i) The sales revenue includes GH¢24 million of revenue for credit sales made on a ‘sale or return’ basis. At 31 December 2018, customers who had not paid for the goods had the right to return GH¢7.8 million of them. PFC applied a markup on cost of 30% on all these sales. In the past, PFC’s customers have sometimes returned goods under this type of agreement.

ii) The depreciable non-current assets have not been depreciated for the year ended 31 December 2018.

PFC has a policy of revaluing its land and buildings at the end of each accounting year. The values in the above statement of financial position are as at 1 January 2018 when the buildings had a remaining life of 18 years. A qualified surveyor has valued the land and buildings at 31 December 2018 at GH¢33 million.
Plant and equipment are depreciated at 12.5% per annum on the reducing balance basis. As at 31 December 2018, the value in use and the fair value less cost to sell were assessed at GH¢21.3 million and GH¢20.25 million respectively.
The patent right was acquired in January 2018 at a cost of GH¢3 million. It is expected to be used for five years after which the right of usage would have to be renewed in January 2023.

iii) The financial assets at fair value through profit or loss are held in a fund whose value changes directly in proportion to a specified market index. At 1 January 2018, the relevant index was 240.0, and at 31 December 2018, the index was 259.2.

iv) In late December 2018, the directors of PFC discovered a material fraud perpetrated by the company’s credit controller. Investigations revealed that a total of GH¢9 million of the trade receivables (included in current assets) as shown in the statement of financial position at 31 December 2018 had in fact been paid and the money had been stolen by the credit controller. An analysis revealed that GH¢3 million had been stolen in the year to 31 December 2017, with the rest being stolen in the current year. PFC is not insured for this loss and it cannot be recovered from the credit controller since his whereabouts are unknown.

v) As at 31 December 2018, the company’s taxable temporary differences had increased to GH¢24 million. The deferred tax relating to the increase in the temporary differences should be taken to profit or loss. The applicable corporate tax rate is 25%. The above figures do not include the estimated provision for current income tax on the profit for the year ended 31 December 2018. After allowing for any adjustments required in items (i) to (iv), the directors have estimated the provision of current tax liability for 2018 at 25% of adjusted profit. (This is in addition to the deferred tax effects of item (v)).

Required:

a) Redraft the financial statements above (taking into consideration the additional information (i) – (v) above). (11 marks)

b) Based on the revised financial statements, provide a range of possible issue prices per share using the Net Assets Method and the Earnings Yield/Price Earnings Ratio Method. (4 marks)

Answer

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Tags: Adjustments, Business Valuation, Earnings Yield, Financial Statements, IPO, Net Assets
Level: Level 3

Topic: Business valuations
Series: MAY 2019

CR – May 2018 – L3 – Q3 – Corporate Reconstruction and Reorganisation

Evaluate two schemes for restructuring a microfinance company and discuss the advantages of each scheme.

Question

Bank of Ghana (BoG) recently announced an increase in the minimum capital requirement for Micro Finance Institutions in the country from GH¢500,000 to GH¢2 million by June 2018. Capital Link, a Micro Finance Company, has been affected by the increase in players in the Micro Finance Industry, which has seen a reduction of its loan portfolio and an increase in loan default rate. A statement of financial position recently prepared by Capital Link is provided:

Statement of Financial Position as at 30th April 2017

Additional information: Depositors are uncertain about the ability of Capital Link to raise the required capital. Management of Capital Link has proposed two options for the company’s future:

Scheme 1 – Close Down Mission:
Unity Capital Ltd has offered GH¢600,000 for the leasehold property. The loan portfolio is conservatively valued at GH¢592,500 in a forced sale. Investments in Treasury bills are valued at GH¢465,000. Liquidation expenses are estimated at GH¢30,000, and interest to depositors is GH¢330,000.
Scheme 2 – Rescue Mission:
Management has proposed to implement a rescue scheme that includes a GH¢600,000 loan from a distress fund set up by an NGO. The loan terms include paying GH¢375,000 to the NGO immediately, with the balance exchanged for a 20% debenture repayable over four years.

Assume:

Current borrowing rate is 14%.
The present value of GH¢1 receivable at the end of each year is:

Year	14%	20%
1	0.88	0.83
2	0.77	0.69
3	0.67	0.58
4	0.59	0.48

Required:
a) By means of numerical analysis of the two schemes, evaluate how much the bank would recover from each scheme. (12 marks)
b) Discuss TWO advantages of each scheme. (3 marks)

Answer

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Tags: Business Valuation, Corporate Reconstruction, Financial Analysis, Liquidation, Loan portfolio, Restructuring
Level: Level 3

Series: MAY 2018

CR – May 2016 – L3 – Q4a – Business valuation

Compute the value of ordinary shares using three valuation methods for a company preparing for listing, based on given financial statements and additional information.

Question

In 2015, the shareholders of Depot Ltd decided to sell their equity stake in the company. The company is not listed and the new shareholders plan to prepare the company for listing once the acquisition was completed. The summarized financial statements of Depot Ltd for the year ended 30th June, 2015 are stated below:

Statement of Income for the year ended 30th June, 2015

The following additional information is provided;

The discounted present value of future cash payments in respect of the long term loan is GH¢48,800,000.
The stated capital of Depot Ltd is made up of 25,000,000 ordinary shares of no par value.
Current Assets include inventory of GH¢6,600,000 representing goods received from a major supplier on “not for sale but display only” basis.
The fair value of the tangible non-current assets was GH¢116,000,000.
The profit for the current year includes VAT of 17.5% on turnover of GH¢8,500,000 being invoice amount sold to a customer.
The discount rate of Depot Ltd is 10% per annum.
Warehouse Ltd, a major competitor of Depot Ltd is listed with a P/E ratio of 9 and dividend yield of 5.2.
Profits after tax over the 4 years were as follows;

Required:
Compute the value to be placed on the ordinary shares using three methods of valuation and advise the Directors accordingly.

Answer

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Tags: Business Valuation, Dividend Yield Method, Financial Statements Analysis, Net Assets Method, Price-Earnings ratio
Level: Level 3

Topic: Business valuations
Series: MAY 2016

FM – Nov 2024 – L2 – Q4a – Business Valuation

Valuing a company using the discounted cash flow model and price multiples.

Question

The relevant data for the three companies are given in the table below:

Variables	Mesewa	Dunsin	Djokoto
Current Price Per Share	7.20	4.50	2.40
Earnings Per Share	0.20	0.15	0.10
Revenue Per Share	3.20	2.25	1.60
Book Value Per Share	1.80	1.00	0.80

Required:
i) Estimate Djokoto’s fair value based on the discounted cash flows model. (5 marks)
ii) Compute the following ratios for the comparable companies:

P/E Ratio (2 marks)
Price-to-Sales Ratio (2 marks)
Price-to-Book-Value Ratio (2 marks)
iii) Based on the valuation results, discuss whether an investor should buy, sell, or hold Djokoto shares. Justify your recommendation. (4 marks)
iii) Identify two advantages and two disadvantages of business combinations.

Answer

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Tags: Business Valuation, Discounted Cash Flow, Financial Modelling, Price-Earnings ratio, Price-to-Book Ratio, Price-to-Sales Ratio
Level: Level 2

Topic: Business valuations
Series: Nov 2024

FM – May 2022 – L3 – Q1 – Business Valuation Techniques

Estimate VT's valuation using FCFE, CAPM, and terminal value assumptions for three-year cash flow forecasts.

Question

The company’s most recent statement of profit or loss and the extracted balances from the latest statement of financial position are as follows:

During the current year:

Depreciation is charged at 10% per annum on the year-end non-current assets balance before accumulated depreciation, and is included in other operating costs in the statement of profit or loss.
The investment in net working capital is expected to increase in line with the growth in gross profit.
Other operating costs consisted of:

Sales and variable costs are projected to grow at 9% per annum and fixed costs are projected to grow at 6% per annum.
The company pays interest on its outstanding loan of 7.5% per annum and incurs tax on its profits at 30%, payable in the following year. The company does not currently pay dividends.

The company will not dispose of any of its non-current assets but will increase its investment in new non-current assets by 20% per annum. The company’s depreciation policy matches the currently available tax allowable depreciation. This straight-line write-off policy is not likely to change;
The directors will not take a dividend for the next three years but will then review the position taking into account the company’s sustainable cash flow at that time;
The level of loan will be maintained at ₦1.98 billion and interest rates are not expected to change.
For estimating the appropriate required return on equity, it is decided to make use of the capital asset pricing model (CAPM). The challenge, however, is that since the company is not quoted, an appropriate beta factor does not exist. You have found a listed company, Konputer Limited (KL) that is into software development. KL is also into computer hardware retailing. It has the following financial statistics:

About 60% of the market value of KL is attributed to the software development division, while 40% of the value is attributed to computer hardware retailing. The computer hardware retailing division has an equity beta of 0.8.
Risk-free rate is 4% and the market risk premium is 8%.
VT has maintained a long-term debt/(debt+equity) ratio of 20%.

Required:

Answer

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Tags: Business Valuation, CAPM, Financial Projections, Free Cash Flow to Equity
Level: Level 3

Topic: Business Valuation Techniques

FM – May 2024 – L3 – SA – Q1 – Business Valuation Techniques

Evaluate the potential acquisition of Kenny Ltd (KL) by Bolade Plc, calculating share value using various valuation methods, assessing these methods, and outlining merger benefits.

Question

KL Income Statement for the Year Ended 28 February 2023

Item	₦m
Revenue	17.3
Profit before interest and tax	5.9
Interest	(0.3)
Profit before taxation	5.6
Tax at 21%	(1.2)
Profit after taxation	4.4
Dividends declared	1.1

KL Statement of Financial Position at 28 February 2023

Item	₦m
Non-current assets:
Freehold land and buildings (original cost ₦4.1m)	3.5
Machinery (original cost ₦8.8m)	5.3
Total Non-current assets	8.8
Current assets:
Inventories	3.0
Receivables	0.5
Cash and bank	2.8
Total Current assets	6.3
Current liabilities:
Trade payables	3.5
Dividends	1.1
Taxation	1.2
Total Current liabilities	(5.8)
Net Current assets	0.5
Net assets	9.3
Non-current liabilities:
10% bonds (redeemable 2031)	(3.0)
Net assets after non-current liabilities	6.3
Equity:
Ordinary shares of ₦1 each	2.1
Retained earnings	4.2
Total equity	6.3

Additional Information:

KL’s management had some of the company’s assets independently revalued in January 2023. Those values are shown below:

Asset	₦m
Freehold land and building	8.3
Machinery	4.1
Inventories	3.1

Year to	₦m
2024	4.6
2025	4.3
2026	5.2
2027	5.7

Assume that the company income tax rate is 21% p.a.

Required:

Using the information provided, prepare a report for Bolade’s board by:

a. Calculating the value of one share in KL based on each of the following methods:

i. Net asset basis (historic cost)
ii. Net asset basis (revalued)
iii. Price/earnings ratio
iv. Dividend yield
v. Present value of future cash flows
(16 Marks)

b. Explain the advantages and disadvantages of using each of the five valuation methods in (a).
(8 Marks)

c. What are the possible benefits from the merger between Bolade Plc (BP) and Kenny Limited (KL).
(6 Marks)

(Total: 30 Marks)

Answer

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Tags: Acquisition, Business Valuation, Mergers, Synergy, Valuation Methods
Level: Level 3

Topic: Business Valuation Techniques
Series: MAY 2024

PM – Nov 2019 – L2 – Q1a – Decision-Making Techniques

Analyze business decision on factory closure by comparing sales volume, advertising costs, and other production costs for two proposals.

Question

A sales volume of 25,000 units can be achieved with a selling price of N13.50 per unit and an advertising campaign of N37,500; or
A sales volume of 35,000 units can be achieved at a selling price of N11.25 with an advertising campaign costing N52,500.

The factory manager has submitted the following information to the management accountant:

Answer

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Tags: Business Valuation, Factory Closure, Production Cost, Relevant Costs, Sales Volume
Level: Level 2

Topic: Decision-making techniques
Series: NOV 2019

CR – Nov 2020 – L3 – Q4a – Business Valuation

Determine share value of Anidaso Ltd using multiple valuation methods including net assets, P/E ratio, dividend yield, and discounted cash flow.

Question

Statement of profit or loss for the year ended 30 September, 2019

	GH¢’000
Revenue	122,900
Cost of sales	(58,650)
Gross profit	64,250
Selling, general & administration expenses	(43,570)
Profit before interest & taxes	20,680
Finance cost	(1,680)
Profit before taxation	19,000
Taxation @ 20%	(4,750)
Profit after tax	14,250

Statement of changes in equity (extracts) for the year ended 30 September, 2019

	GH¢’000
Retained Earnings at October 1, 2018	47,970
Profit for the year	14,250
Dividend paid	(6,200)
Retained Earnings at 30 September, 2019	56,020

Statement of Financial Position as at 30 September, 2019

	GH¢’000	GH¢’000
Non-current assets
Development expenditure	13,050
Patents	8,200
Property, plant, and equipment	98,750	120,000
Current assets
Inventories	21,700
Trade receivables	12,501
Bank and cash	5,944	40,145
Current liabilities
Trade payables	(15,400)	24,745
Net current assets	144,745
Non-current liabilities
10% Debenture loan stock	(12,000)	132,745
Equity
Share capital	50,000
Revaluation Surplus	26,725
Retained Earnings	56,020	132,745

Additional relevant information:

The share capital of the company is composed of:
- GH¢000
- 20% redeemable preference shares 10,000
- Ordinary shares (issued @GH¢0.20 each) 40,000
- Total share capital: 50,000
A review of the development expenditure indicated that only 50% of it is worthwhile.
An independent valuer has placed values on some of the assets of Anidaso Ltd below:
- Property, plant & equipment: GH¢111,000
- Inventories: GH¢16,200
- Trade receivables: GH¢10,000
- Total value: GH¢137,200
Profit forecasts for the next five years of Anidaso Ltd are as follows:

Year-end 30 September Profit before Tax (GH¢’000) Depreciation Charge (GH¢’000)

2020 14,900 1,100

2021 16,000 1,225

2022 19,250 1,550

2023 19,800 2,025

2024 21,550 2,130
The patents in the statement of financial position represent a license to produce an improved variety of a product and is expected to generate a pre-tax profit of GH¢10,000 per year for the next five years.
Abiola Limited is a competitor company listed on the Ghana Stock Exchange, and data extracted from its recently published financial statements revealed the following details:
- Market capitalization: GH¢1,000,000
- Number of ordinary shares: 800,000
- Earnings per share: GH¢0.20
- Dividend payout ratio: 80%
The cost of capital of Anidaso Ltd is 10%.

Year-end 30 September	Profit before Tax (GH¢’000)	Depreciation Charge (GH¢’000)
2020	14,900	1,100
2021	16,000	1,225
2022	19,250	1,550
2023	19,800	2,025
2024	21,550	2,130

Answer

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Tags: Business Valuation, Discounted Cash Flow, Dividend Yield, Net Asset Valuation, Price-Earnings ratio, Share Valuation
Level: Level 3

Topic: Business valuations
Series: NOV 2020

SCS – Aug 2022 – L3 – Q5 – Financial Management

Prepare Little Bee’s financial forecast and calculate its gearing ratios, explaining their significance to Bazar.

Question

Using the additional information presented by AB Consult & Associate to the Director of Finance and Operations, Mrs. Emma Owusu-Kwakye, on 4 August, prepare the following:

Answer

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Tags: Business Valuation, Combined Gearing, Financial Forecast, Financial Gearing, Operating Gearing
Level: Level 3

Topic: Financial management
Series: AUG 2022

FA – May 2024 – L1 – SA – Q6 – Intangible Assets and Goodwill

Identifies the correct description of goodwill in financial statements.

Question

Which of the following about goodwill is true?

Answer

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Tags: Business Valuation, Goodwill, Intangible Assets
Level: Level 1

Topic: Intangible Assets and Goodwill
Series: MAY 2024

CR – May 2019 – L3 – Q3 – Business valuations

The question involves redrafting financial statements of PFC based on additional information provided and calculating a range of possible issue prices for an IPO using Net Assets Method and Earnings Yield/Price Earnings Ratio Method.

Question

Statement of Profit or Loss for the year ended 31 December 2018

	GH¢’000
Sales Revenue (note i)	150,000
Cost of Sales	(72,000)
Gross Profit	78,000
Operational Expenses	(34,800)
Finance Costs (Interest on debenture stocks)	(1,200)
Net Profit	42,000
Taxation (@ 25%)	(10,500)
Profit for the period	31,500

Statement of Financial Position as at 31 December 2018

	GH¢’000
Non-current assets
Property at Valuation (Land GH¢3 million; buildings GH¢27 million)	30,000
Plant and Equipment	24,000
Intangible Asset – Patent Right	3,000
Financial Asset (fair valued through profit or loss at 1/1/2018)	7,500
Total Non-current Assets	64,500
Current Assets	30,000
Total Assets	94,500
Equity and Liabilities
Stated Capital (4 million shares issued at GH¢3.00 per share)	12,000
Retained Earnings	57,960
Total Equity	69,960
Non-current liabilities
20% Debenture Stocks (2018-2020)	6,000
Deferred Tax provision (1 January 2018)	4,500
Total Non-current Liabilities	10,500
Current Liabilities
Trade Payables	3,540
Current Tax liability	10,500
Total Current Liabilities	14,040
Total Equity and Liabilities	94,500

Additional Information:

ii) The depreciable non-current assets have not been depreciated for the year ended 31 December 2018.

PFC has a policy of revaluing its land and buildings at the end of each accounting year. The values in the above statement of financial position are as at 1 January 2018 when the buildings had a remaining life of 18 years. A qualified surveyor has valued the land and buildings at 31 December 2018 at GH¢33 million.
Plant and equipment are depreciated at 12.5% per annum on the reducing balance basis. As at 31 December 2018, the value in use and the fair value less cost to sell were assessed at GH¢21.3 million and GH¢20.25 million respectively.
The patent right was acquired in January 2018 at a cost of GH¢3 million. It is expected to be used for five years after which the right of usage would have to be renewed in January 2023.

Required:

a) Redraft the financial statements above (taking into consideration the additional information (i) – (v) above). (11 marks)

b) Based on the revised financial statements, provide a range of possible issue prices per share using the Net Assets Method and the Earnings Yield/Price Earnings Ratio Method. (4 marks)

Answer

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Tags: Adjustments, Business Valuation, Earnings Yield, Financial Statements, IPO, Net Assets
Level: Level 3

Topic: Business valuations
Series: MAY 2019

CR – May 2018 – L3 – Q3 – Corporate Reconstruction and Reorganisation

Evaluate two schemes for restructuring a microfinance company and discuss the advantages of each scheme.

Question

Statement of Financial Position as at 30th April 2017

Additional information: Depositors are uncertain about the ability of Capital Link to raise the required capital. Management of Capital Link has proposed two options for the company’s future:

Scheme 1 – Close Down Mission:
Unity Capital Ltd has offered GH¢600,000 for the leasehold property. The loan portfolio is conservatively valued at GH¢592,500 in a forced sale. Investments in Treasury bills are valued at GH¢465,000. Liquidation expenses are estimated at GH¢30,000, and interest to depositors is GH¢330,000.
Scheme 2 – Rescue Mission:
Management has proposed to implement a rescue scheme that includes a GH¢600,000 loan from a distress fund set up by an NGO. The loan terms include paying GH¢375,000 to the NGO immediately, with the balance exchanged for a 20% debenture repayable over four years.

Assume:

Current borrowing rate is 14%.
The present value of GH¢1 receivable at the end of each year is:

Year	14%	20%
1	0.88	0.83
2	0.77	0.69
3	0.67	0.58
4	0.59	0.48

Required:
a) By means of numerical analysis of the two schemes, evaluate how much the bank would recover from each scheme. (12 marks)
b) Discuss TWO advantages of each scheme. (3 marks)

Answer

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Tags: Business Valuation, Corporate Reconstruction, Financial Analysis, Liquidation, Loan portfolio, Restructuring
Level: Level 3

Series: MAY 2018

CR – May 2016 – L3 – Q4a – Business valuation

Compute the value of ordinary shares using three valuation methods for a company preparing for listing, based on given financial statements and additional information.

Question

Statement of Income for the year ended 30th June, 2015

The following additional information is provided;

The discounted present value of future cash payments in respect of the long term loan is GH¢48,800,000.
The stated capital of Depot Ltd is made up of 25,000,000 ordinary shares of no par value.
Current Assets include inventory of GH¢6,600,000 representing goods received from a major supplier on “not for sale but display only” basis.
The fair value of the tangible non-current assets was GH¢116,000,000.
The profit for the current year includes VAT of 17.5% on turnover of GH¢8,500,000 being invoice amount sold to a customer.
The discount rate of Depot Ltd is 10% per annum.
Warehouse Ltd, a major competitor of Depot Ltd is listed with a P/E ratio of 9 and dividend yield of 5.2.
Profits after tax over the 4 years were as follows;

Required:
Compute the value to be placed on the ordinary shares using three methods of valuation and advise the Directors accordingly.

Answer

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Tags: Business Valuation, Dividend Yield Method, Financial Statements Analysis, Net Assets Method, Price-Earnings ratio
Level: Level 3

Topic: Business valuations
Series: MAY 2016

Question Tag: Business Valuation

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FM – Nov 2024 – L2 – Q4a – Business Valuation

Valuing a company using the discounted cash flow model and price multiples.

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FM – May 2024 – L3 – SA – Q1 – Business Valuation Techniques

Evaluate the potential acquisition of Kenny Ltd (KL) by Bolade Plc, calculating share value using various valuation methods, assessing these methods, and outlining merger benefits.

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CR – Nov 2020 – L3 – Q4a – Business Valuation

Determine share value of Anidaso Ltd using multiple valuation methods including net assets, P/E ratio, dividend yield, and discounted cash flow.

Statement of profit or loss for the year ended 30 September, 2019

Statement of changes in equity (extracts) for the year ended 30 September, 2019

Statement of Financial Position as at 30 September, 2019

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Prepare Little Bee’s financial forecast and calculate its gearing ratios, explaining their significance to Bazar.

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FA – May 2024 – L1 – SA – Q6 – Intangible Assets and Goodwill

Identifies the correct description of goodwill in financial statements.

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CR – May 2019 – L3 – Q3 – Business valuations

The question involves redrafting financial statements of PFC based on additional information provided and calculating a range of possible issue prices for an IPO using Net Assets Method and Earnings Yield/Price Earnings Ratio Method.

Statement of Profit or Loss for the year ended 31 December 2018

Statement of Financial Position as at 31 December 2018

Additional Information:

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Evaluate two schemes for restructuring a microfinance company and discuss the advantages of each scheme.

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CR – May 2016 – L3 – Q4a – Business valuation

Compute the value of ordinary shares using three valuation methods for a company preparing for listing, based on given financial statements and additional information.

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FM – Nov 2024 – L2 – Q4a – Business Valuation

Valuing a company using the discounted cash flow model and price multiples.

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Estimate VT's valuation using FCFE, CAPM, and terminal value assumptions for three-year cash flow forecasts.

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Evaluate the potential acquisition of Kenny Ltd (KL) by Bolade Plc, calculating share value using various valuation methods, assessing these methods, and outlining merger benefits.

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PM – Nov 2019 – L2 – Q1a – Decision-Making Techniques

Analyze business decision on factory closure by comparing sales volume, advertising costs, and other production costs for two proposals.

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CR – Nov 2020 – L3 – Q4a – Business Valuation

Determine share value of Anidaso Ltd using multiple valuation methods including net assets, P/E ratio, dividend yield, and discounted cash flow.

Statement of profit or loss for the year ended 30 September, 2019

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SCS – Aug 2022 – L3 – Q5 – Financial Management

Prepare Little Bee’s financial forecast and calculate its gearing ratios, explaining their significance to Bazar.

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FA – May 2024 – L1 – SA – Q6 – Intangible Assets and Goodwill

Identifies the correct description of goodwill in financial statements.

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CR – May 2019 – L3 – Q3 – Business valuations

The question involves redrafting financial statements of PFC based on additional information provided and calculating a range of possible issue prices for an IPO using Net Assets Method and Earnings Yield/Price Earnings Ratio Method.

Statement of Profit or Loss for the year ended 31 December 2018

Statement of Financial Position as at 31 December 2018

Additional Information:

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CR – May 2018 – L3 – Q3 – Corporate Reconstruction and Reorganisation

Evaluate two schemes for restructuring a microfinance company and discuss the advantages of each scheme.

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CR – May 2016 – L3 – Q4a – Business valuation

Compute the value of ordinary shares using three valuation methods for a company preparing for listing, based on given financial statements and additional information.

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