- 20 Marks
CR – Mar 2025 – L3 – Q4 – Business Valuation
Calculate share value for Gogomi LTD using net assets, price-earnings, and dividend yield methods.
Question
a) Gogomi LTD, a privately owned joint venture, produces a range of equipment for the oil and gas industry in Ghana. One of the venturers, Oman Pension Funds (OPF), who holds one-third of Gogomi LTD’s ordinary shares, has decided to sell all of its holdings. This plan forms part of measures OPF is using to redirect focus of its investment strategy by replacing its equity assets with fixed-income holdings. OPF would therefore like to know the current value of its shareholdings to guide it during any negotiation with a potential buyer.
The following draft financial statements (together with the additional information) should be used to estimate the share value:
Draft statement of profit or loss of Gogomi LTD for the year ended 31 August 2024
| GH¢000 | |
|---|---|
| Revenue | 115,500 |
| Cost of sales | (80,300) |
| Gross profit | 35,200 |
| Selling and distribution | (12,300) |
| Administrative expenses | (8,550) |
| Profit before tax | 14,350 |
| Tax | (2,030) |
| Profit after tax | 12,320 |
Draft statement of financial position of Gogomi LTD as at 31 August 2024
| GH¢000 | |
|---|---|
| Assets | |
| Non-current assets: | |
| Properties | 52,400 |
| Plant and equipment | 53,300 |
| Current assets | 35,300 |
| Total assets | 141,000 |
| Equity and liabilities | |
| Capital and reserves | |
| Ordinary shares @ GH¢2 each | 24,000 |
| 10% Irredeemable preference shares @ GH¢1.50 each | 6,000 |
| Retained earnings | 57,500 |
| Non-current liabilities | 38,080 |
| Current liabilities | 15,420 |
| Total equity and liabilities | 141,000 |
Additional information:
- Included in properties is an office building whose fair value has been measured by a valuation specialist at GH¢25 million. This value compares to a book value of GH¢19.5 million. Plant is not yet adjusted for a required reversal of GH¢2 million impairment charge previously written off to profit or loss account against an item of plant. On 28 August 2024, Gogomi LTD bought an item of equipment and paid GH¢15.2 million, net of 5% withholding tax, to the equipment dealer. Management have expensed the associated withholding tax (already paid to the local tax office) within the income statement.
- Included in receivables is an amount of GH¢4.4 million owed by a customer who has fallen into an unexpected, serious financial difficulty. As a consequence, expert assessment indicates that Gogomi LTD will have to wait until 31 August 2025 to receive the full amount in a single payment.
- Gogomi LTD’s current ordinary dividend cover computed, based on the above draft accounts, is 4. Preference dividends have been fully paid.
- A comparable quoted firm’s price-earnings ratio and dividend yield are 7.2 and 4.52% respectively. No adjustment should be made to these ratios, if they are used in any computations.
- Applicable cost of capital is 10%.
Required:
Determine a range of values to be placed on each ordinary share of Gogomi LTD using:
i) Net assets basis
ii) Price-earnings basis
iii) Dividend yield basis
b) For the purpose of consolidation, a parent must consolidate all controlled entities. However, there is an exemption that applies to investment entities.
Find Related Questions by Tags, levels, etc.
- Tags: Consolidation, Financial Reporting, IFRS 10, Investment Entities
- Level: Level 3
- Topic: Consolidated Financial Statements (IFRS 10)
- Series: MAR 2025
