Question Tag: Market Value

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PT – Nov 2024 – L2 – Q3b – Capital Gains Tax and Asset Realization

Tax computation on asset realization and understanding taxable capital assets.

Question

b) Kwamoso LTD sold the following assets to Mr. Badu on 18 May, 2023 for GH¢450,000 to settle a tax liability. Kwamoso LTD is not listed on the Ghana Stock Exchange.

Below are details of the assets:

Name of Asset	Cost (GH¢)	Net Book Value (GH¢)	Market Value (18 May 2023) (GH¢)	Market Value (31 Dec 2023) (GH¢)
Truck vehicle	750,000	480,000	320,000	350,000
Generator	60,000	29,400	8,400	8,000
Laptops	48,000	17,200	8,000	7,200

Required:

i) Compute the consideration received in respect of each asset realised.

ii) What constitutes capital assets in the context of capital gains tax in Ghana?

iii) Under what circumstance would there be a loss in the realization of a liability?

Answer

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Tags: Capital Gains, Market Value, Tax computation, Tax Liability, Taxable Assets
Level: Level 2

Topic: Taxation of Capital Gains
Series: Nov 2024

FM – May 2022 – L3 – Q5 – Cost of Capital

Calculate market value WACC for JP and discuss its preference over book value WACC for investment appraisals.

Question

The directors of Jindadi Plc. (JP), an Abuja-based entertainment company, are currently considering the appropriate cost of capital to use in appraising capital investments. It is the policy of the company to assess the financial viability of all capital projects using the net present value criterion.

You have been provided with some financial information about the company.

JP has an equity beta of 1.2, and the ex-dividend market value of the company’s equity is N1 billion. The ex-interest market value of the convertible bonds is N168 million, and the ex-dividend market value of the preference shares is N50 million.

The convertible bonds of JP have a conversion ratio of 19 ordinary shares per bond. The conversion date and redemption date are both on the same date in five years’ time. The current ordinary share price of JP is expected to increase by 4% per year for the foreseeable future.

The equity risk premium is 5% per year, and the risk-free rate of return is 4% per year. JP pays profit tax at an annual rate of 30% per year.

Required:

a. Calculate the market value after-tax weighted average cost of capital of JP, explaining clearly any assumptions you make. (10 Marks)

b. Discuss why market value weighted average cost of capital is preferred to book value weighted average cost of capital when making investment decisions. (5 Marks)

Answer

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Tags: Book value, Convertible Bonds, Investment decisions, Market Value, Preference shares, WACC
Level: Level 3

Topic: Cost of capital

FM – Nov 2016 – L3 – Q1 – Investment Appraisal Techniques

Evaluate TP’s project considering current market values and assess the risk-adjusted cost of capital.

Question

Tinko Plc (TP) repairs and maintains heavy-duty trucks, with workshops in Nigeria and several other African countries. TP is considering an expansion project in response to the government’s recent policy aimed at encouraging mechanized farming through the “Graduates Back To Land (GBTL)” program, which will likely increase demand for heavy-duty machinery.

Below are extracts from the most recent Statement of Financial Position of TP:

Item	₦’million
Share capital	200
Reserves	320
Non-current liabilities	760
Current liabilities	60
Total	1,340

TP’s Free Cash Flows to Equity (FCFE) is currently estimated at ₦153 million, and it is expected to grow at 2.5% per annum indefinitely. The equity shareholders require a return of 11%.

The non-current liabilities consist entirely of bonds redeemable in four years at par with a coupon rate of 5.4%. The debt is rated BB, and the credit spread on BB-rated debt is 80 basis points above the risk-free rate.

In light of the GBTL program, TP is contemplating entry into the mechanized farming support industry through a four-year project, recognizing that after four years, competition may intensify significantly.

The project requires an initial investment of ₦84 million and is expected to generate the following after-tax cash flows:

Additional Information:

Scenario Adjustments:
- There is a 25% probability that the GBTL program will not grow as expected in the first year. If this occurs, the present value of the project’s cash flows over its four-year life will be 50% of the original estimates.
- If the GBTL program grows as expected in the first year, there is still a 20% probability that growth will slow in subsequent years, reducing the present value of cash flows to 40% of the original estimates for those years.
Sale Option: Feedwell Limited (FL) has offered ₦100 million to buy the project from TP at the start of the second year. TP is evaluating if this option adds strategic value to the project.
Abako Plc, a comparable company, operates primarily in non-agricultural services, similar to TP, and has an equity beta of 1.6. Abako derives approximately 80% of its revenues from services outside agriculture, with an asset beta of 0.80. Abako’s capital structure consists of 80 million shares trading at ₦4.50 per share and debt of ₦340 million.
The debt is trading at ₦1,050 per ₦1,000 with a zero debt beta.
Risk-free rate: 4%; Market risk premium: 6%; Corporate tax rate: 20%.

Requirements: a. Calculate TP’s current total market value of:

i. Equity (3 Marks)
ii. Bonds (4 Marks) b. Determine the risk-adjusted cost of capital for the new project (to the nearest percent) (10 Marks) c. Estimate the value of the project:
i. Without factoring in the potential strategic value or synergy from the project (5 Marks)
ii. With FL’s offer, assuming it reflects the market’s view of the project’s value (5 Marks) d. Clearly state the assumptions made in your calculations (3 Marks)

Answer

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Tags: Cost of Capital, Debt Valuation, Equity Valuation, Market Value, Project Valuation, Risk Adjustment
Level: Level 3

Topic: Investment Appraisal Techniques

FM – Nov 2020 – L3 – Q2 – Mergers and Acquisitions

Evaluates the acquisition impact of Yekin plc by Peter John plc, focusing on P/E ratio, EPS, market value, and strategic implications of a hostile takeover versus organic growth.

Question

Peter John plc (PJP) is considering a takeover bid for Yekin plc (YP).

PJP’s board of directors has issued the following statement:
“Our superior P/E ratio and synergistic effects of the acquisition will lead to a post-acquisition increase in earnings per share and in the combined market value of the companies.”

Summarized financial data for the companies (N Million):

	PJP	YP
Sales	480.0	353.0
Profit before tax	63.0	41.0
Tax	(18.9)	(12.3)
Profit after tax	44.1	28.7
Dividends	20.0	11.0
Non-current assets (net)	284.0	265.0
Current assets	226.4	173.0
Total assets	510.4	438.0

Equity and Liabilities:

	PJP	YP
Ordinary shares (10 kobo par value)	40.0	30.0
Reserves	211.2	192.0
Medium and long-term borrowing	86.0	114.0
Current liabilities	173.2	102.0
Total	510.4	438.0

Notes:

After-tax savings in cash operating costs of N7,500,000 per year indefinitely are expected as a result of the acquisition.
Initial redundancy costs will be ₦10 million before tax.
PJP’s cost of capital is 12%.
Current share prices: PJP = N29, YP = N18.
The proposed terms of the takeover are payment of 2 PJP shares for every 3 YP shares.

Required:

a. Calculate the current P/E ratios of PJP and YP. (2 Marks)
b. Estimate the expected post-acquisition earnings per share and comment upon the importance of increasing the earnings per share. (4 Marks)
c. Estimate the effect on the combined market value as a result of the takeover using:
i. P/E-based valuation
ii. Cash flow-based valuation
State clearly any assumptions that you make. (5 Marks)
d. Discuss the limitations of your estimates in (c) above. (3 Marks)
e. Evaluate the strategic implications of making a hostile bid for a company compared with an aggressive investment program of organic growth. (6 Marks)

Answer

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Tags: Market Value, P/E Ratio, post-acquisition EPS, Synergy, takeover strategy, Valuation Techniques
Level: Level 3

Topic: Mergers and acquisitions

FM – Nov 2023 – L1 – SC – Q5 – Business Valuation Techniques

Calculate convertible bonds' value as debt, assess market expectations, and analyze conversion inducements and dividend policy effects on convertible bonds.

Question

Ope plc has N10m 5 percent convertible bonds in issue. The option to convert into 40 N1 ordinary shares is open only for one more year; they must be either converted in one year’s time or left as ordinary bonds until nine years’ time when they will be redeemed at par. The current share price is ₦1.60, and the annual growth rate in share price is 15 percent per annum. The current required return on Ope’s equity is 25 percent, as its business is relatively risky.

The current yield on ordinary non-convertible bonds in similar companies is 11 percent. These interest rates are expected to remain constant.

Ife plc has 100,000 warrants outstanding, each entitling the holder to subscribe for one N1 ordinary share at 90 kobo anytime during the next 3 years. The current share price is 57 kobo, and capital growth is expected to be constant at 12 percent per annum in the future. The current price of the warrant is 10 kobo.

Required:

a. Calculate the current value of Ope’s convertibles as straight debt, i.e., ignoring the option to convert, and the value if conversion were to take place today. Would you expect the market value of the convertible to be above or below each of these amounts, and why? (5 Marks)

b. By how much should the share price of Ope Plc rise before holders would be induced to convert on the last possible date for conversion? (4 Marks)

c. Explain why the market value of a convertible bond is likely to be affected by the dividend policy of the issuing company. (4 Marks)

d. Based on the projected capital growth for Ife Plc, would you expect holders of
the warrants to exercise them before expiry? What is the minimum annual
growth -rate of the share price necessary to induce holders to exercise their
warrants?
(2 Marks)

Answer

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Tags: Convertible Bonds, Convertible Securities, Debt and Equity, Market Value, Valuation, Warrants
Level: Level 3

Topic: Business Valuation Techniques
Series: NOV 2023

TAX – Nov 2020 – L1 – SA – Q15 – Taxation of Specialized Businesses

Identify the definition of "market value" under the Land Use Charge Law of Lagos State, 2018.

Question

Under the Land Use Charge Law of Lagos State, 2018, “market value” means:
A. Total sum of land value and building development
B. Building development
C. The total developed floor area of building on the plot of land in square metres
D. The average construction value of medium quality buildings and improvement in the neighbourhood
E. The average market value of a land parcel in the neighbourhood

Answer

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Tags: Lagos State Tax Law, Land Use Charge, Market Value, Property Tax
Level: Level 1

Topic: Taxation of Specialized Businesses
Series: NOV 2020

AFM – May 2016 – L3 – Q3a – Valuation of acquisitions and mergers, Acquisitions and mergers versus other growth strategies

Calculate pre-acquisition market values of two companies and determine the maximum price for an acquisition.

Question

a) Plainview Farms Limited is considering acquiring Cottage Industries Limited. The extracts of the financial statements of the two companies are as follows:

Statement of Financial Position

	Plainview Farms Ltd (GH¢’m)	Cottage Industries Ltd (GH¢’m)
Net Assets	6,300	1,892
Equity Capital	2,000	1,000
Income Surplus	4,300	892

Income Statement

	Plainview Farms Ltd (GH¢’m)	Cottage Industries Ltd (GH¢’m)
Profit after tax	800	300
Dividend	(600)	(100)
Retained earnings	200	200

The two companies retain the same proportion of profits each year, and this is expected to continue in the future. Plainview Farms Limited’s return on investment is 16%, while Cottage Industries Limited’s is 21%. One year after the post-acquisition period, Plainview Farms will retain 60% of its earnings and expects to earn a return of 20% on new investment.

The dividends of both companies have been paid. The required rate of return for ordinary shareholders of Plainview Farms Limited is 12%, and for Cottage Industries Limited it is 18%. After the acquisition, the required rate of return will become 16%.

Required:
i) Calculate the pre-acquisition market values of both companies. (5 marks)
ii) Calculate the maximum price Plainview Farms Limited will pay for Cottage Industries Limited. (5 marks)

Answer

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Tags: Acquisitions, Market Value, Mergers, Shareholder Returns, Valuation
Level: Level 3

Topic: Acquisitions and mergers versus other growth strategies, Valuation of acquisitions and mergers
Series: MAY 2016

PSAF – Nov 2020 – L2 – Q1c – General purpose financial reporting framework

This question discusses various measurement bases used in public sector financial reporting and their impact on reflecting the cost of service, operational capacity, and financial capacity.

Question

According to the Conceptual Framework for General Purpose Financial Reports (GPFR), the objective of measurement in financial reporting in public sector entities is to select those measurement bases that most fairly reflect the cost of services, operational capacity, and financial capacity of the entity in a manner that is useful for accountability and decision-making purposes.

Required: Explain the under listed bases and discuss the extent to which each measurement reflects the cost of service, operational capacity, and financial capacity of an entity.

i) Historical cost

ii) Market Value

iii) Replacement cost

Answer

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Tags: Historical Cost, Market Value, Measurement Bases, Public Sector, Replacement cost
Level: Level 2

Topic: General purpose financial reporting framework
Series: NOV 2020

FM – March 2023 – L2 – Q2a – Mergers and acquisitions

Calculate the combined company's EPS, weighted average P/E ratio, market value per share, total market capitalization, and the premium received by Finkyim Ltd.

Question

Panpana Ltd is operating in the same industry as Finkyim Ltd, but Finkyim Ltd is experiencing leadership crisis leading to poor performance. Panpana Ltd, upon realizing this, is putting up a bid to take over Finkyim Ltd. It has been agreed that Panpana Ltd will pay 0.7 of its own shares for each of the shares in Finkyim Ltd. This acquisition has no economies of scale and operating synergy. The relevant financial data of the two companies are as follows:

	Panpana Ltd	Finkyim Ltd
Net Sales	GH¢503,000	GH¢178,000
Profit After Tax	GH¢88,000	GH¢18,000
Number of Shares	18,000	4,500
Price per Share	GH¢50	GH¢30
Price-Earnings (P/E) Ratio	10	8

Required:
i) Calculate the Earnings per Share (EPS) for the combined company. (3 marks)
ii) Calculate the Weighted Average P/E ratio for the combined company. (3 marks)
iii) Calculate the Market Value per Share for the combined company. (2 marks)
iv) Calculate the Total Market Capitalization for the combined company. (2 marks)
v) Calculate the Premium received by Finkyim Ltd. (4 marks)

Answer

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Tags: Acquisition premium, Earnings Per Share, Market Value, Mergers, Price-Earnings ratio
Level: Level 2

Topic: Mergers and acquisitions
Series: MAR 2023

FM – MAR 2024 – L2 – Q2 – Mergers and acquisitions

This question focuses on calculating the share exchange ratio, the market value, EPS, and P/E ratio of a combined business after acquisition, and discusses defensive tactics that can be used to prevent a hostile takeover.

Question

Olongon Plc (Olongon) and Kwatrikwa Plc (Kwatrikwa) are competitors listed on the Ghana Stock Exchange. Due to poor managerial decisions, Kwatrikwa’s earning power has been uncertain in recent years, making shareholders contemplate selling the business. However, the management of Kwatrikwa has used various defensive tactics to block any takeover they perceive to be hostile. In the just-ended Annual General Meeting (AGM), Kwatrikwa’s shareholders resolved to sell the company. Shareholders of Olongon have expressed interest in acquiring Kwatrikwa and have suggested to the board to put a proposal together for consideration in the next extraordinary meeting. Olongon’s board has gathered the information below to guide the drafting of the proposal:

Company	Olongon	Kwatrikwa
Earnings per share (GH¢)	0.50	0.50
Retention ratio	0.60	0.40
Price per share (GH¢)	10.00	5.00
Number of shares	25,000	25,000

Required:

a) Assuming the acquisition will be financed with shares, how many shares of Olongon should be exchanged for all the shares of Kwatrikwa based on market value?
(4 marks)

b) Assuming the share price of the combined business after the acquisition is the same as the share price of Olongon, calculate the market value, earnings per share, and the Price/Earnings ratio of the combined business.
(6 marks)

c) Calculate the cost of the acquisition if Olongon pays GH¢130,000 in cash for Kwatrikwa.
(2 marks)

d) Explain FOUR (4) defensive tactics the management of Kwatrikwa can employ to prevent Olongon from acquiring the company.
(8 marks)

Answer

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Tags: Defensive Tactics, Earnings Per Share, Market Value, Share Exchange
Level: Level 2

Topic: Mergers and acquisitions
Series: MAR 2024

PT – Nov 2024 – L2 – Q3b – Capital Gains Tax and Asset Realization

Tax computation on asset realization and understanding taxable capital assets.

Question

b) Kwamoso LTD sold the following assets to Mr. Badu on 18 May, 2023 for GH¢450,000 to settle a tax liability. Kwamoso LTD is not listed on the Ghana Stock Exchange.

Below are details of the assets:

Name of Asset	Cost (GH¢)	Net Book Value (GH¢)	Market Value (18 May 2023) (GH¢)	Market Value (31 Dec 2023) (GH¢)
Truck vehicle	750,000	480,000	320,000	350,000
Generator	60,000	29,400	8,400	8,000
Laptops	48,000	17,200	8,000	7,200

Required:

i) Compute the consideration received in respect of each asset realised.

ii) What constitutes capital assets in the context of capital gains tax in Ghana?

iii) Under what circumstance would there be a loss in the realization of a liability?

Answer

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Tags: Capital Gains, Market Value, Tax computation, Tax Liability, Taxable Assets
Level: Level 2

Topic: Taxation of Capital Gains
Series: Nov 2024

FM – May 2022 – L3 – Q5 – Cost of Capital

Calculate market value WACC for JP and discuss its preference over book value WACC for investment appraisals.

Question

You have been provided with some financial information about the company.

The equity risk premium is 5% per year, and the risk-free rate of return is 4% per year. JP pays profit tax at an annual rate of 30% per year.

Required:

a. Calculate the market value after-tax weighted average cost of capital of JP, explaining clearly any assumptions you make. (10 Marks)

b. Discuss why market value weighted average cost of capital is preferred to book value weighted average cost of capital when making investment decisions. (5 Marks)

Answer

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Tags: Book value, Convertible Bonds, Investment decisions, Market Value, Preference shares, WACC
Level: Level 3

Topic: Cost of capital

FM – Nov 2016 – L3 – Q1 – Investment Appraisal Techniques

Evaluate TP’s project considering current market values and assess the risk-adjusted cost of capital.

Question

Below are extracts from the most recent Statement of Financial Position of TP:

Item	₦’million
Share capital	200
Reserves	320
Non-current liabilities	760
Current liabilities	60
Total	1,340

TP’s Free Cash Flows to Equity (FCFE) is currently estimated at ₦153 million, and it is expected to grow at 2.5% per annum indefinitely. The equity shareholders require a return of 11%.

The project requires an initial investment of ₦84 million and is expected to generate the following after-tax cash flows:

Additional Information:

Scenario Adjustments:
- There is a 25% probability that the GBTL program will not grow as expected in the first year. If this occurs, the present value of the project’s cash flows over its four-year life will be 50% of the original estimates.
- If the GBTL program grows as expected in the first year, there is still a 20% probability that growth will slow in subsequent years, reducing the present value of cash flows to 40% of the original estimates for those years.
Sale Option: Feedwell Limited (FL) has offered ₦100 million to buy the project from TP at the start of the second year. TP is evaluating if this option adds strategic value to the project.
Abako Plc, a comparable company, operates primarily in non-agricultural services, similar to TP, and has an equity beta of 1.6. Abako derives approximately 80% of its revenues from services outside agriculture, with an asset beta of 0.80. Abako’s capital structure consists of 80 million shares trading at ₦4.50 per share and debt of ₦340 million.
The debt is trading at ₦1,050 per ₦1,000 with a zero debt beta.
Risk-free rate: 4%; Market risk premium: 6%; Corporate tax rate: 20%.

Requirements: a. Calculate TP’s current total market value of:

i. Equity (3 Marks)
ii. Bonds (4 Marks) b. Determine the risk-adjusted cost of capital for the new project (to the nearest percent) (10 Marks) c. Estimate the value of the project:
i. Without factoring in the potential strategic value or synergy from the project (5 Marks)
ii. With FL’s offer, assuming it reflects the market’s view of the project’s value (5 Marks) d. Clearly state the assumptions made in your calculations (3 Marks)

Answer

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Tags: Cost of Capital, Debt Valuation, Equity Valuation, Market Value, Project Valuation, Risk Adjustment
Level: Level 3

Topic: Investment Appraisal Techniques

FM – Nov 2020 – L3 – Q2 – Mergers and Acquisitions

Evaluates the acquisition impact of Yekin plc by Peter John plc, focusing on P/E ratio, EPS, market value, and strategic implications of a hostile takeover versus organic growth.

Question

Peter John plc (PJP) is considering a takeover bid for Yekin plc (YP).

Summarized financial data for the companies (N Million):

	PJP	YP
Sales	480.0	353.0
Profit before tax	63.0	41.0
Tax	(18.9)	(12.3)
Profit after tax	44.1	28.7
Dividends	20.0	11.0
Non-current assets (net)	284.0	265.0
Current assets	226.4	173.0
Total assets	510.4	438.0

Equity and Liabilities:

	PJP	YP
Ordinary shares (10 kobo par value)	40.0	30.0
Reserves	211.2	192.0
Medium and long-term borrowing	86.0	114.0
Current liabilities	173.2	102.0
Total	510.4	438.0

Notes:

After-tax savings in cash operating costs of N7,500,000 per year indefinitely are expected as a result of the acquisition.
Initial redundancy costs will be ₦10 million before tax.
PJP’s cost of capital is 12%.
Current share prices: PJP = N29, YP = N18.
The proposed terms of the takeover are payment of 2 PJP shares for every 3 YP shares.

Required:

Answer

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Tags: Market Value, P/E Ratio, post-acquisition EPS, Synergy, takeover strategy, Valuation Techniques
Level: Level 3

Topic: Mergers and acquisitions

FM – Nov 2023 – L1 – SC – Q5 – Business Valuation Techniques

Calculate convertible bonds' value as debt, assess market expectations, and analyze conversion inducements and dividend policy effects on convertible bonds.

Question

The current yield on ordinary non-convertible bonds in similar companies is 11 percent. These interest rates are expected to remain constant.

Required:

b. By how much should the share price of Ope Plc rise before holders would be induced to convert on the last possible date for conversion? (4 Marks)

c. Explain why the market value of a convertible bond is likely to be affected by the dividend policy of the issuing company. (4 Marks)

Answer

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Tags: Convertible Bonds, Convertible Securities, Debt and Equity, Market Value, Valuation, Warrants
Level: Level 3

Topic: Business Valuation Techniques
Series: NOV 2023

TAX – Nov 2020 – L1 – SA – Q15 – Taxation of Specialized Businesses

Identify the definition of "market value" under the Land Use Charge Law of Lagos State, 2018.

Question

Answer

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Tags: Lagos State Tax Law, Land Use Charge, Market Value, Property Tax
Level: Level 1

Topic: Taxation of Specialized Businesses
Series: NOV 2020

AFM – May 2016 – L3 – Q3a – Valuation of acquisitions and mergers, Acquisitions and mergers versus other growth strategies

Calculate pre-acquisition market values of two companies and determine the maximum price for an acquisition.

Question

a) Plainview Farms Limited is considering acquiring Cottage Industries Limited. The extracts of the financial statements of the two companies are as follows:

Statement of Financial Position

	Plainview Farms Ltd (GH¢’m)	Cottage Industries Ltd (GH¢’m)
Net Assets	6,300	1,892
Equity Capital	2,000	1,000
Income Surplus	4,300	892

Income Statement

	Plainview Farms Ltd (GH¢’m)	Cottage Industries Ltd (GH¢’m)
Profit after tax	800	300
Dividend	(600)	(100)
Retained earnings	200	200

Required:
i) Calculate the pre-acquisition market values of both companies. (5 marks)
ii) Calculate the maximum price Plainview Farms Limited will pay for Cottage Industries Limited. (5 marks)

Answer

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Tags: Acquisitions, Market Value, Mergers, Shareholder Returns, Valuation
Level: Level 3

Topic: Acquisitions and mergers versus other growth strategies, Valuation of acquisitions and mergers
Series: MAY 2016

PSAF – Nov 2020 – L2 – Q1c – General purpose financial reporting framework

This question discusses various measurement bases used in public sector financial reporting and their impact on reflecting the cost of service, operational capacity, and financial capacity.

Question

Required: Explain the under listed bases and discuss the extent to which each measurement reflects the cost of service, operational capacity, and financial capacity of an entity.

i) Historical cost

ii) Market Value

iii) Replacement cost

Answer

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Tags: Historical Cost, Market Value, Measurement Bases, Public Sector, Replacement cost
Level: Level 2

Topic: General purpose financial reporting framework
Series: NOV 2020

FM – March 2023 – L2 – Q2a – Mergers and acquisitions

Calculate the combined company's EPS, weighted average P/E ratio, market value per share, total market capitalization, and the premium received by Finkyim Ltd.

Question

	Panpana Ltd	Finkyim Ltd
Net Sales	GH¢503,000	GH¢178,000
Profit After Tax	GH¢88,000	GH¢18,000
Number of Shares	18,000	4,500
Price per Share	GH¢50	GH¢30
Price-Earnings (P/E) Ratio	10	8

Answer

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Tags: Acquisition premium, Earnings Per Share, Market Value, Mergers, Price-Earnings ratio
Level: Level 2

Topic: Mergers and acquisitions
Series: MAR 2023

FM – MAR 2024 – L2 – Q2 – Mergers and acquisitions

This question focuses on calculating the share exchange ratio, the market value, EPS, and P/E ratio of a combined business after acquisition, and discusses defensive tactics that can be used to prevent a hostile takeover.

Question

Company	Olongon	Kwatrikwa
Earnings per share (GH¢)	0.50	0.50
Retention ratio	0.60	0.40
Price per share (GH¢)	10.00	5.00
Number of shares	25,000	25,000

Required:

a) Assuming the acquisition will be financed with shares, how many shares of Olongon should be exchanged for all the shares of Kwatrikwa based on market value?
(4 marks)

c) Calculate the cost of the acquisition if Olongon pays GH¢130,000 in cash for Kwatrikwa.
(2 marks)

d) Explain FOUR (4) defensive tactics the management of Kwatrikwa can employ to prevent Olongon from acquiring the company.
(8 marks)

Answer

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Tags: Defensive Tactics, Earnings Per Share, Market Value, Share Exchange
Level: Level 2

Topic: Mergers and acquisitions
Series: MAR 2024

Question Tag: Market Value

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PT – Nov 2024 – L2 – Q3b – Capital Gains Tax and Asset Realization

Tax computation on asset realization and understanding taxable capital assets.

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FM – May 2022 – L3 – Q5 – Cost of Capital

Calculate market value WACC for JP and discuss its preference over book value WACC for investment appraisals.

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FM – Nov 2016 – L3 – Q1 – Investment Appraisal Techniques

Evaluate TP’s project considering current market values and assess the risk-adjusted cost of capital.

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FM – Nov 2020 – L3 – Q2 – Mergers and Acquisitions

Evaluates the acquisition impact of Yekin plc by Peter John plc, focusing on P/E ratio, EPS, market value, and strategic implications of a hostile takeover versus organic growth.

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FM – Nov 2023 – L1 – SC – Q5 – Business Valuation Techniques

Calculate convertible bonds' value as debt, assess market expectations, and analyze conversion inducements and dividend policy effects on convertible bonds.

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TAX – Nov 2020 – L1 – SA – Q15 – Taxation of Specialized Businesses

Identify the definition of "market value" under the Land Use Charge Law of Lagos State, 2018.

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AFM – May 2016 – L3 – Q3a – Valuation of acquisitions and mergers, Acquisitions and mergers versus other growth strategies

Calculate pre-acquisition market values of two companies and determine the maximum price for an acquisition.

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PSAF – Nov 2020 – L2 – Q1c – General purpose financial reporting framework

This question discusses various measurement bases used in public sector financial reporting and their impact on reflecting the cost of service, operational capacity, and financial capacity.

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FM – March 2023 – L2 – Q2a – Mergers and acquisitions

Calculate the combined company's EPS, weighted average P/E ratio, market value per share, total market capitalization, and the premium received by Finkyim Ltd.

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FM – MAR 2024 – L2 – Q2 – Mergers and acquisitions

This question focuses on calculating the share exchange ratio, the market value, EPS, and P/E ratio of a combined business after acquisition, and discusses defensive tactics that can be used to prevent a hostile takeover.

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PT – Nov 2024 – L2 – Q3b – Capital Gains Tax and Asset Realization

Tax computation on asset realization and understanding taxable capital assets.

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FM – May 2022 – L3 – Q5 – Cost of Capital

Calculate market value WACC for JP and discuss its preference over book value WACC for investment appraisals.

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FM – Nov 2016 – L3 – Q1 – Investment Appraisal Techniques

Evaluate TP’s project considering current market values and assess the risk-adjusted cost of capital.

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FM – Nov 2020 – L3 – Q2 – Mergers and Acquisitions

Evaluates the acquisition impact of Yekin plc by Peter John plc, focusing on P/E ratio, EPS, market value, and strategic implications of a hostile takeover versus organic growth.

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FM – Nov 2023 – L1 – SC – Q5 – Business Valuation Techniques

Calculate convertible bonds' value as debt, assess market expectations, and analyze conversion inducements and dividend policy effects on convertible bonds.

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TAX – Nov 2020 – L1 – SA – Q15 – Taxation of Specialized Businesses

Identify the definition of "market value" under the Land Use Charge Law of Lagos State, 2018.

You're reporting an error for "TAX – Nov 2020 – L1 – SA – Q15 – Taxation of Specialized Businesses"

AFM – May 2016 – L3 – Q3a – Valuation of acquisitions and mergers, Acquisitions and mergers versus other growth strategies

Calculate pre-acquisition market values of two companies and determine the maximum price for an acquisition.

You're reporting an error for "AFM – May 2016 – L3 – Q3a – Valuation of acquisitions and mergers, Acquisitions and mergers versus other growth strategies"

PSAF – Nov 2020 – L2 – Q1c – General purpose financial reporting framework

This question discusses various measurement bases used in public sector financial reporting and their impact on reflecting the cost of service, operational capacity, and financial capacity.

You're reporting an error for "PSAF – Nov 2020 – L2 – Q1c – General purpose financial reporting framework"

FM – March 2023 – L2 – Q2a – Mergers and acquisitions

Calculate the combined company's EPS, weighted average P/E ratio, market value per share, total market capitalization, and the premium received by Finkyim Ltd.

You're reporting an error for "FM – March 2023 – L2 – Q2a – Mergers and acquisitions"

FM – MAR 2024 – L2 – Q2 – Mergers and acquisitions

This question focuses on calculating the share exchange ratio, the market value, EPS, and P/E ratio of a combined business after acquisition, and discusses defensive tactics that can be used to prevent a hostile takeover.

You're reporting an error for "FM – MAR 2024 – L2 – Q2 – Mergers and acquisitions"

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