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  • 11 Marks

FM – Nov 2024 – L2 – Q4a – Business Valuation

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

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.

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  • 30 Marks

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.

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:

  1. 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.
  2. The investment in net working capital is expected to increase in line with the growth in gross profit.
  3. Other operating costs consisted of:

  1. Sales and variable costs are projected to grow at 9% per annum and fixed costs are projected to grow at 6% per annum.
  2. 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)

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  • 30 Marks

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.

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)

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  • 20 Marks

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.

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)

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  • 15 Marks

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.

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%.

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

 

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Has Case Study
  • 10 Marks

SCS – Aug 2022 – L3 – Q5 – Financial Management

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

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)

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  • 1 Marks

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

Identifies the correct description of goodwill in financial statements.

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.

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  • 15 Marks

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.

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)

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  • 15 Marks

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

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

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)

 

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  • 15 Marks

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.

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;

  1. The discounted present value of future cash payments in respect of the long term loan is GH¢48,800,000.
  2. The stated capital of Depot Ltd is made up of 25,000,000 ordinary shares of no par value.
  3. Current Assets include inventory of GH¢6,600,000 representing goods received from a major supplier on “not for sale but display only” basis.
  4. The fair value of the tangible non-current assets was GH¢116,000,000.
  5. 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.
  6. The discount rate of Depot Ltd is 10% per annum.
  7. Warehouse Ltd, a major competitor of Depot Ltd is listed with a P/E ratio of 9 and dividend yield of 5.2.
  8. 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.

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  • 15 Marks

CR – Nov 2023 – L3 – Q4a – Business Valuation

Determine appropriate valuation methods and price range for Odenkey Plc based on financial statements and additional information provided.

a) The Directors of Odenkey Plc have decided to sell their business and have begun a search for organisations interested in the purchase. As a Consultant, you have been asked to determine the appropriate range of price per share suitable for the company. Relevant information is as follows:

Additional information:

  1. The receivables include GH¢12,000,000 of revenue for credit sales made on a ‘sale or return’ basis. On 31 December 2022, customers who had not paid for the goods, had the right to return GH¢5,000,000 worth of them. Odenkey Plc applied a markup on cost of 25% on all these sales. Based on previous transactions, it is expected that 80% of the goods will be returned.
  2. The property, plant and equipment includes a building that was originally acquired for GH¢20,000,000 five years ago with an initial estimated useful life of 20 years. The property was revalued to GH¢18,000,000 as at 31 December 2022, and the revaluation reserve is yet to be recognised in the financial statement. Due to degradation of the land on which the building stands, the company undertook an impairment review and it was found that, the fair value of the property as at 31 December 2022 is estimated to be GH¢17,000,000. The value in use of the property is calculated as being GH¢16,000,000.
  3. The patent was originally acquired 2 years ago and the rights were set at 50 years from the date the patent was originally purchased. The patent was amortised by Odenkey Plc using straight line method over the remaining copyright period. However, recent legislative changes passed on 1 January 2022 have extended the patent period forever. The Research and Development departments projects net future cashflow of GH¢4,500,000 per year from the patent even though the prices of similar patents on the market are valued at GH¢ 18,500,000.
  4. The company had a retained earnings balance of GH¢5,000,000 as at 31 December 2021. It has always practiced a dividend payout ratio of 35% when it makes profit during the year.
  5. The following information relates to Odenkey Plc and a competitor Odafomtim Ltd: Odenkey Plc Odafomtim Ltd Number of Shares 3,000,000 500,000 5 years’ average sales growth 8% 9% 5 years’ average growth in EBIT 6% 10.5% P/E ratio as at 31 December 2022 – 18.61 Estimated return on equity 9.5% 12%
  6. The company’s cost of capital is 25%.
  7. Odafomtim Ltd is a listed firm and has a sizeable market share.

Required:

i) Use the information provided to suggest FOUR (4) valuations which prospective purchasers might make.

(12 marks)

ii) Comment on the appropriateness of the range of price per share of Odenkey Plc that the Directors can offer.

(3 marks)

 

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  • 12 Marks

CR – Aug 2022 – L3 – Q4b – Business Valuation

This question requires computing the valuation of Tinto Ltd using three different methods: the net assets method, the price-earnings ratio method, and the dividend growth method.

Tinto Ltd produces handicrafts for both local and foreign markets. The company was incorporated several years ago. The shareholders of Tinto Ltd would now like to realize their investment. In order to arrive at an estimate of what they believe the business is worth, they have identified a long-established quoted company, Dingo Ltd, which has a similar business but produces for the European market only.

Summarized financial statistics for the two companies for the most recent financial year are as follows:

Tinto Ltd Dingo Ltd
Issued shares (million) 8 20
Net assets value (GH¢ ’million) 14.4 30
Earnings per share (GH¢) 0.35 0.28
Dividend per share (GH¢) 0.20 0.24
Debt: Equity ratio 1:7 1:6.5
Share price (as quoted on the stock market) – GH¢ – 1.60
Expected rate of growth in earnings/dividends 5% 5%

Additional Information:

  1. The net assets of Tinto Ltd are the net book values of tangible non-current assets, including working capital. However:
    • A recent valuation of the buildings was GH¢1,500,000 above book value.
    • An investment held, which is designated as Equity Financial Asset at Fair Value through Profit or Loss with a carrying value of GH¢1,000,000, is fair valued at GH¢1,100,000.
    • Due to a dispute with one of their clients, an additional allowance for bad debts of GH¢750,000 could prudently be made.
    • An item of plant with a carrying value of GH¢800,000 is assessed to have a value-in-use of GH¢760,000 and fair value less cost to sell of GH¢780,000.
  2. Growth rate should be assumed to be constant per annum. Tinto Ltd’s earnings growth rate estimate was provided by the marketing manager, based on expected growth in sales adjusted by normal profit margins. Dingo Ltd’s growth rates are gleaned from press reports.
  3. The dividend yield of Dingo Ltd approximates its cost of equity.

Required:

Compute a range of valuations for the business of Tinto Ltd, using the information available and stating any assumptions made. Use the following methods for the valuation:

i) Net assets method (5 marks)
ii) Price-earnings method (3 marks)
iii) Dividend growth method (4 marks)

(Note: Ignore tax implications.)

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  • 12 Marks

CR – Nov 2017 – L3 – Q3b – Business Valuation

Estimate the value per share of Agos Limited using net assets, dividend valuation, and P/E ratio methods.

Santader Limited intends to take over Agos Limited. The financial statements of Agos Limited for the year ended 30 June 2016 are as follows:

Here are the tables from Question 3b exactly as they appear in the attachment:

Agos Limited – Income Statement for the year ended 30 June, 2016

Description Amount (GH¢)
Profit before tax 450,000
Tax (125,000)
Profit after tax 325,000

Agos Limited – Statement of Retained Earnings for the year ended 30 June 2016

Description Amount (GH¢)
Balance at beginning 250,000
Profit after tax 325,000
Dividend paid (180,000)
Balance at end 395,000

Additional Information
Turnover, profits before tax, and dividends of Agos Limited over the past 5 years:

Year Ending 30 June Sales (GH¢) Pre-tax Profits (GH¢) Dividend (GH¢)
2012 5,800,000 250,000 65,000
2013 6,900,000 320,000 80,000
2014 7,700,000 330,000 100,000
2015 8,500,000 410,000 120,000
2016 9,800,000 450,000 180,000
  1. The patent represents a license to produce and sell a special product. This product is expected to generate a pre-tax profit of GH¢12,000 per annum in perpetuity.
  2. The discount rate of Agos Limited is 10% per annum.
  3. Nhyira Limited, a major competitor of Agos Limited, is listed on the Stock Exchange and has a P/E ratio of 8 and a dividend yield of 10%.
  4. Nhyira Limited expects a return of 11% of the net assets.

Required:
Estimate the value per share of Agos Limited as at 30 June, 2016 using the following methods:
i) Net Assets
ii) Dividend Valuation
iii) Price/earning ratio

 

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  • 20 Marks

FM – May 2021 – L2 – Q2 – Business Valuations

This question covers distinctions between price and value, the subjectivity of valuation, and the valuation of a printing segment using DCF and asset-based methods.

Kwaafi and Sons Ltd operates a newspaper business. The business has various segments, namely: traditional media, online news, events, and printing. The company’s new strategy is to concentrate on online news, outsource its printing services, and discontinue the printing segment.

The printing segment is one of the company’s cash cows, generating 30% of its revenue of GH¢28,000,000 annually. The company aims to take advantage of the Continental Free Trade Agreement to serve other African countries.

Before deciding to concentrate on online news, the company undertook an extensive retooling of its printing segment. The Finance Director has produced the following information:

i) A new coloured printer was purchased to replace a 15-year-old printer, which was purchased for GH¢3,000,000 and is now obsolete but can be sold as scrap for GH¢15,000.

ii) The new coloured printer was purchased two years ago at GH¢8,000,000 and has a useful life of six years.

iii) A contract has been signed for the servicing of the equipment at a retainer fee of GH¢755,250 per annum over the life of the equipment.

iv) The stock of toners and rollers for the old printer worth GH¢280,000 is obsolete at no cost.

v) Replacement parts for the new equipment, which are enough for the useful life of the equipment is valued at GH¢300,000.

vi) Special carbonated toners for the old printer costing GH¢230,000 is unusable and has to be disposed of at a residual value of GH¢13,000 as soon as possible.

vii) Eighteen (18) rolls of printing sheets and twenty-five (25) boxes of metal plates are valued at GH¢240,000 and GH¢420,000, respectively. These need replacement every year at similar costs.

viii) Annual rent and rates of GH¢800,000, payable at the end of each year, increase by 10% every 2 years.

ix) Other operating expenses of GH¢3,200,000, payable at the end of the year, increases at 10% annually until year 3.

x) It is estimated that the printing segment will now generate 10% more revenue per annum for the New Printer’s remaining life. Depreciation is based on the straight-line method.

xi) For valuation purposes, an expected rate of return of 30% has been agreed upon among the parties. Ignore taxation and inflation.

Following the announcement to discontinue the printing segment, the senior staff of the segment proposed to raise funds to buy the assets of the segment. They obtained invoices of similar assets and used the prices to make an offer to the Board of Directors.

The Finance Director disagreed and suggested that an expert valuer value the assets of the company and its operations. The senior staff have objected to the valuation proposals arguing that valuations are subjective and may not reflect the accurate value of the assets to be disposed off by the company.

Required:

a) Distinguish between market price and value in the context of business valuation. (3 marks)

b) Explain why a valuation process is described as subjective. (2 marks)

c) Calculate the value of the printing segment using the discounted cash flow method. (12 marks)

d) Calculate the value of the printing segment using the assets-based method. (3 marks)

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  • 20 Marks

FM – Nov 2020 – L2 – Q2 – Business valuations

Estimate the value of equity capital using different valuation methods: Book value, Replacement cost, Realizable value, Gordon growth model, and P/E ratio model.

The directors of Carmen Ltd, a large conglomerate, are considering the acquisition of the entire share capital of Manon Ltd, a private limited company that manufactures a range of engineering machinery. Neither company has any long-term debt capital. The directors of Carmen Ltd believe that if Manon Ltd is taken over, the business risk of Carmen Ltd will not be affected.

The accounting year of Manon Ltd ends on 31 December. Its Statement of Financial Position as at 31 December 2018 is expected to be as follows:

Manon Ltd’s summarized statement of profit or loss extract for the five years to 31 December 2018 is as follows:

The following additional information is available:

i) There have been no changes in the issued share capital of Manon Ltd during the past five years.
ii) The estimated values of Manon Ltd’s PPE and inventory and work-in-progress as at 31 December 2018 are:

Replacement cost (GH¢) Realizable value (GH¢)
PPE 725,000 450,000
Inventory and work-in-progress 550,000 570,000

iii) It is expected that 2% of Manon’s debtors at 31 December 2018 will be uncollectible.
iv) The cost of capital of Carmen Ltd is 9%. The directors of Manon Ltd estimate that the shareholders of Manon Ltd require a minimum return of 12% per annum from their investment in the company.
v) The current P/E ratio of Carmen Ltd is 12. Quoted companies with business activities and profitability similar to those of Manon Ltd have P/E ratios of approximately 10, although these companies tend to be much larger than that of Manon Ltd.

Required:

Estimate the value of the total equity capital of Manon Ltd as at 31 December 2018 using each of the following bases:

a) Book value (2 marks)
b) Replacement cost (4 marks)
c) Realizable value (4 marks)
d) The Gordon dividend growth model (5 marks)
e) The P/E ratio model (5 marks)

 

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  • 20 Marks

FM – DEC 2023 – L2 – Q2 – Business valuations | Mergers and acquisitions

Business valuation techniques applied to a 70% acquisition using P/E ratio, balance sheet valuation, and discounted cash flow.

a) Panpana Ltd is in advanced negotiation with shareholders of Zanu Ltd to acquire 70% shares in that company. The following financial information is provided for Zanu Ltd:

  • Number of ordinary shares = 20 million
  • Net assets per share = GH¢8
  • Earning per share = GH¢15
  • Price Earnings ratio (P/E) = 10

The Finance Director who performed a due diligence review recommended the following:

  1. Fixed assets included in the net assets were overstated by GH¢6 million
  2. A key customer who owes GH¢4 million has gone bankrupt and debt considered irrecoverable
  3. A provision of GH¢10 million is made for a tax liability
  4. Panpana Ltd cost of capital is 16% and risk premium of 4% is added in the valuation of Zanu Ltd to take care of additional operational risk.
  5. The Finance manager provided a statement showing projected cash inflows for the next 5 years as follows:
Year Cash flow (GH¢ million)
1 125
2 60
3 150
4 200
5 110

Required:
Advise shareholders of Panpana Ltd on how much to pay for 70% of the shares of Zanu Ltd using the following valuation methods:
i) Price Earning (P/E) ratio. (4 marks)
ii) Balance sheet valuation basis. (5 marks)
iii) Cash flow valuation. (5 marks)

b) Explain THREE (3) reasons business valuation is undertaken in the corporate environment. (6 marks)

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  • 20 Marks

FM – May 2020 – L2 – Q2 – Business valuations | Mergers and acquisitions

Value Staygood Ltd using the Price/Earnings ratio, Gordon growth model, and Discounted cash flow methods for a potential takeover by Restwell Ltd.

Restwell Ltd (Restwell), a hotel and leisure company, is currently considering taking over a smaller private limited liability company, Staygood Ltd (Staygood). The board of Restwell is in the process of making a bid for Staygood but first needs to place a value on the company. Restwell has gathered the following data:

Restwell:

  • Weighted average cost of capital: 12%
  • P/E ratio: 12
  • Shareholders’ required rate of return: 15%

Staygood:

  • Current dividend payment (GH¢): 0.27
  • Past five years’ dividend payments (GH¢): 0.15, 0.17, 0.18, 0.21, 0.23
  • Current EPS: 0.37
  • Number of ordinary shares issued: 5 million

The required rate of return of the shareholders of Staygood is 20% higher than that of Restwell due to the higher level of risk associated with Staygood. Restwell estimates that cash flows at the end of the first year will be GH¢2.5 million and these will grow at an annual rate of 5%. Restwell also expects to raise GH¢5 million in two years’ time by selling off hotels of Staygood that are surplus to its needs.

Required:

Estimate values for Staygood using the following valuation methods:

i) Price/earnings ratio valuation. (6 marks)

ii) Gordon growth model. (8 marks)

iii) Discounted cash flow valuation. (6 marks)

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  • 20 Marks

FM – MAY 2016 – L2 – Q3 – Business valuations

Discuss fiscal and monetary policies, adverse effects of contractionary fiscal policy, and valuation of Papa’s Skin Ltd.

a) Governments take certain measures with a view to influencing aggregate demand in their economy.
Required:
i) Distinguish between fiscal policy and monetary policy. (2 marks)
ii) Explain TWO adverse effects a contractionary fiscal policy could have on businesses. (4 marks)

b) Papa’s Skin Ltd is an Accra-based clothing company owned and managed by its two founders. The company has been selling to only domestic consumers in Ghana since inception. The founders think it is time to extend the operations of the company to foreign markets, particularly those in neighbouring West African countries. Moving into foreign markets requires additional financing and capabilities, which the company does not have. The owners have agreed on ceding 40% stake in their company to a strategic investor who would provide the additional financing and capabilities needed to compete successfully in the international business environment. However, they are not sure of what range of prices to accept for the shares they would give up.

Below is a summary of financial data for Papa’s Skin Ltd for the recent financial year:

  • Issued shares: 2 million
  • After-tax profit: GH¢9,600,000
  • Total dividends: GH¢1,920,000
  • Property, plant and equipment: GH¢50,500,000
  • Current assets: GH¢25,300,000
  • Long-term borrowings: GH¢9,100,000
  • Current liabilities: GH¢11,100,000

The following information is relevant to the position and value of Papa’s Skin Ltd:

  1. The assets of Papa’s Skin Ltd were valued just after the recent financial statements were published. Inventories and trade receivables, which are included in current assets, were written down by GH¢80,000 and GH¢95,000 respectively. Property, plant and equipment were valued at GH¢52,400,000.
  2. Papa’s Skin Ltd falls into the fabrics and clothing industry. The average P/E ratio for listed equity stocks in the industry is 10. The average required return on listed equity stocks in the industry is 16%.
  3. Marketability of shares in Papa’s Skin Ltd is limited as its equity stock is not listed on the stock exchange. Consequently, investors demand a marketability risk premium of 7% above the industry average required return on equity in order to invest in the equity stock of Papa’s Skin Ltd.
  4. Earnings and dividends of Papa’s Skin Ltd are expected to grow by 5% every year to perpetuity.

Required:
i) Estimate an appropriate required rate of return on the equity stock of Papa’s Skin Ltd. (2 marks)
ii) Estimate a range of suitable considerations for a 40% stake in Papa’s Skin Ltd using the net assets method, P/E ratio method, and dividend valuation method. (12 marks)

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  • 20 Marks

FM – July 2023 – L2 – Q2 – Mergers and acquisitions

Calculate the value of a combined business after a merger, determine the maximum and minimum acceptable prices for the merger, and evaluate the type of merger.

Amanfi Ltd manufactures cooking oil for the local markets in Ghana. The management of Amanfi Ltd believes that by merging with one of their input suppliers, Aseebu Ltd, the company will be able to control supply, thus giving the Amanfi Group a low-price advantage in the market. Aseebu Ltd is a key supplier of inputs to companies in the cooking oil industry. The financial statements of the two companies are shown below:

Income Statement for the past Five Years (Amanfi Ltd)

Year (Million GH¢) 2018 2019 2020 2021 2022 (current year)
Sales 3,720 4,092 4,500 4,950 5,442
Cost of Sales (1,674) (1,841) (2,025) (2,228) (2,449)
Operating Profit 2,046 2,251 2,475 2,722 2,993
Finance Cost (252) (278) (305) (336) (369)
Earnings Before Tax 1,794 1,973 2,170 2,386 2,624
Tax @ 30% (538) (592) (651) (716) (787)
Earnings After Tax 1,256 1,381 1,519 1,670 1,837

Income Statement for the past Five Years (Aseebu Ltd)

Year (Million GH¢) 2018 2019 2020 2021 2022 (current year)
Sales 1,860 2,046 2,250 2,475 2,496
Cost of Sales (837) (921) (1,013) (1,114) (1,123)
Operating Profit 1,023 1,125 1,237 1,361 1,373
Finance Cost (126) (139) (153) (168) (169)
Earnings Before Tax 897 986 1,084 1,193 1,204
Tax @ 30% (269) (296) (325) (358) (361)
Earnings After Tax 628 690 759 835 843

Additional Information:
Amanfi Ltd and Aseebu Ltd have beta of 1.6 and 1.1 respectively. The government treasury bill rate pays a yield of 8% and risk premium on the market is 17%. If the merger goes through, the combined company’s earnings after tax will grow at the same rate as Amanfi Ltd. The merger will lead to annual cost savings of GH¢850 million in perpetuity.

Required:
a) As a Finance Manager, calculate the value of the combined business based on the present value of expected earnings. (8 marks)
b) What is the maximum amount that Amanfi Ltd should pay for Aseebu Ltd? (4 marks)
c) What is the minimum bid that Aseebu Ltd shareholders should be prepared to accept? (4 marks)
d) Calculate the gain/loss from the merger. (2 marks)
e) Identify and explain the type of merger between Amanfi Ltd and Aseebu Ltd. (2 marks)

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  • 12 Marks

FM – Nov 2017 – L2 – Q5a – Business valuations

Estimate the value per share of LHW Ltd using different valuation methods including net asset value, P/E ratio, and dividend yield basis.

Paul and Tony Reid are the owners of LHW Ltd., publishers of “Luxury Homes of the World”. As with similar publishers, they are currently experiencing difficult market conditions. Paul wishes to sell his share of the business to Tony to pursue other interests. Paul feels their business has a “long term value” not captured by current market values. Paul and Tony wish to have their business “properly valued” so a “fair” buyout price can be agreed.

LHW Ltd: Balance Sheet as at 31 December 2016

Net profit after tax and interest payments but before dividends was GH¢250,000, and the annual dividend was GH¢100,000 for the year ended December 31, 2016.

Covenants in the debentures require that a change in ownership of LHW would result in the redeeming of its debentures. They must be redeemed at “fair market value” based on the yield on comparable bonds, which is currently 8% p.a. The semi-annual coupon has just been paid with 10 more due before the bond would mature in 2022.

Paul and Tony estimate that 20% of LHW’s debtors are likely to be irrecoverable, but feel that current market conditions will improve and that over the next three years, earnings should increase by 5% per annum.

Independent valuations state that the current realizable values of the company’s fixed assets are:

Fixed Asset Realisable Value (GH¢ million)
Land and Buildings 2.0
Plant and Machinery 4.0
Fixtures and Fittings 1.2
Motor Vehicles 0.35
Total 7.55

For a firm similar to LHW Ltd with similar growth expectations but which is quoted on the stock exchange, the Price Earnings (P/E) ratio was 14 times, and its gross dividend yield was 10%.

Required:
a) Given the above information, estimate the value per share of LHW Ltd using:
i) The net asset (liquidation) basis
ii) The P/E basis
iii) The dividend yield basis (assume with no growth)
iv) The dividend yield basis (assume with growth) (12 marks)

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