Question Tag: Valuation

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  • 7 Marks

PSAF – Nov 2024 – L2 – Q2a – Valuation of Legacy Fixed Assets

Valuation and accounting treatment of legacy fixed assets in compliance with IPSAS.

The Ministry of Indigenous Enterprises has been charged to collect legacy fixed assets data and value them in accordance with International Public Sector Accounting Standards (IPSAS). The Fixed Assets Coordinating Unit (FACU) of the Ministry has collected for valuation the following data for your action:

The Ministry owns a four (4) storey Office Administration block. The average cost per floor is GH¢4,741,256.25. The building was constructed on a land size of 20 plots of land owned by the Ministry. Currently, a plot of land in that area costs GH¢2,500,000. The FACU has measured the sizes of the building as follows:

  • Length: 87.5 meters
  • Width: 42.65 meters
  • Reference Price per Square Meter: GH¢4,432

However, a professional body, the Institute of Architects and Engineers, has given the reference price for the cost of such an office building at an estimated price of GH¢87,965,025. The building has not seen any further facelift ever since. However, a fence wall with a gate to enforce security and secure the land has just been completed in the current year at a cost of GH¢8,970,000 with a lifespan of 50 years.

The year of construction of the office building could not be determined, yet an old watchman who had been there for ages remembers that the building was constructed some 42 years ago, a time when his seventh child was born. It is the decision of the Government of Ghana on the adoption of IPSAS not to take advantage of the three-year exemption period but to account for legacy fixed assets by taking 60% of the reference cost of the legacy assets as the deemed cost, with a reduced lifespan of 30 years.

Required:

i) Calculate the cost of the land and buildings with structures to be brought into the books on the adoption of IPSAS and determine the depreciation chargeable in the first year in respect of these assets.                                                                                              ii) Show the extract of Statement of Financial Position of the Ministry of Indigenous
Enterprises as at that date

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  • 7 Marks

FR – Nov 2024 – L2 – Q2c – Intangible Assets and Their Measurement

Determining the correct accounting treatment for various intangible assets in Dolo LTD's financial statements, including licensing, software, and book rights.

Question:

Dolo LTD, a market leader in the pharmaceutical industry, incurred the following expenditures during the financial year ended 31 December 2023:

Expenditure Item Amount (GH¢’000) Additional Information
Licence to operate in the pharmaceutical industry (10-year validity from January 2023) 200 Intangible asset
Costs incurred in setting up a website for a new product 20 The website will be developed in 2024
Purchase of 295 personal computers on 1 July 2023 (three-year useful life) 840 Excludes software costs
Windows operating system (for 295 PCs) 530 Perpetual software license
Microsoft Office software (for 295 PCs) 24 Three-year software license
Induction training for new staff 430 Staff training for new hires
Book rights purchased from another entity a few years ago 90 The rights have an indefinite useful life
Independent valuation of book rights as of 31 Dec 2023 240 Valued by an independent expert

Dolo LTD’s policy is to use the revaluation model for intangible assets where a market valuation is available.

Required:
Determine the carrying amount of intangible assets at 31 December 2023, in accordance with IAS 38 – Intangible Assets and IFRS.

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  • 15 Marks

FM – Nov 2016 – L3 – SC – Q5 – Portfolio Management

Assess CAPM's basic assumptions and determine overvalued securities among four companies using CAPM metrics.

a. Capital Asset Pricing Model (CAPM) is an equilibrium model of the trade-off between expected portfolio return and unavoidable risk.
What are the basic assumptions on which this model is based? (6 Marks)

b. Currently, the rate of return on the Federal Government Bond redeemable at par in the year 2018 is 5%. The securities of four companies, Akira Plc., Bombadia Plc., Courage Plc., and Divine Plc., have expected returns of 12%, 9.5%, 10.5%, and 13%, respectively. The average expected return on the market portfolio is 10%, subject to a 6% risk (standard deviation). Other relevant information relating to the four securities of the companies is as stated below:

Company Standard Deviation Correlation Coefficient
Akira Plc 0.080 0.975
Bombadia Plc 0.075 0.640
Courage Plc 0.090 0.740
Divine Plc 0.150 0.680

You are required to show which of the companies is/are overvalued. (9 Marks)

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  • 20 Marks

FM – Nov 2016 – L3 – SB – Q2 – Investment Appraisal Techniques

Calculate the value of the convertible loan stock, expected growth rate in equity price, and provide recommendations on whether to hold or sell the security.

Honey Comb Plc has issued 10% convertible loan stock, which is due for redemption in 10 years’ time (i.e., December 31, 2025). The option to convert is open only for another two years. If conversion does not take place by December 31, 2017, the option will lapse. The issue was sold to the public at a price of N920 for N1000 of convertible loan stock. The conversion rate at January 1, 2016 was 250 equity shares for N1000 of stock. Non-convertible loan stock in a similar risk class is presently yielding 12%. The market price of Honey Comb Plc equity shares has been increasing steadily over time, reflecting the performance of the company. The shares currently pay a dividend of N0.30 per share. The current price of the convertible security is N960, and each share is currently valued at N3.00. A holder of the convertible loan stock is considering whether to sell his holdings or continue to hold the stock. Ignore taxation while answering the questions.

Required:
a. What is the value of the security as simple unconvertible loan stock? (5 Marks)

b. What is the expected minimum annual rate of growth in the equity share price that is required to justify the holder of convertible loan stock holding on to the security before the option expires? (12 Marks)

c. What recommendation would you make to the holder of the security and why? (3 Marks)

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  • 20 Marks

FM – May 2017 – L3 – Q3 – Business Valuation Techniques

Compute Free Cash Flow to Equity and value per share using FCFE model.

LA Ltd., a food packaging company, has operated as a private company for the past 10 years. The company has been growing rapidly over the last few years. The Directors are now considering listing the company on the stock market. Preparatory to this, the Directors are interested in determining a fair price per share for the company. Assume today is November 1, 2016.

The following information has been extracted from the most recent audited financial statements of LA Ltd:

Statement of Profit or Loss, October 31, 2016

₦million
Sales Revenue 15,790
Cost of Sales (13,514)
EBITDA 2,276
Depreciation (440)
EBIT 1,836
Interest Expense (330)
Earnings Before Tax 1,506
Tax at 30% (452)
Profit After Tax 1,054

Statement of Financial Position as at October 31:

Additional Facts

  • The Directors believe that the Free Cash Flow to Equity (FCFE) model should provide an appropriate valuation for the company’s shares.
  • An investment banker has provided the following estimates of cost of capital:
    • Cost of equity: 15%
    • Post-tax cost of debt: 4%
    • WACC: 12.5%
  • The Directors believe that the FCFE will grow by 18% for the next 5 years and by 5% thereafter.
  • The company currently has 600 million shares in issue.

Required:

a. Calculate the free cash flow available to equity for the year ended October 31, 2016. (7 Marks)

b. Use the Free Cash Flow to Equity model to calculate the current value per share. (5 Marks)

c. What are the key advantages and disadvantages of stock exchange listing? (8 Marks)

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  • 20 Marks

FM – Nov 2014 – L3 – SB – Q3 – Mergers and Acquisitions

Appraise Syntax Plc.'s proposed acquisition of Synapse Chemical Company based on forecast profits and provide a recommendation.

Syntax Plc., a fertilizer company, is concerned about fluctuating sales and earnings. This caused the management of the company to consider acquisition of another company in the same line of business.

In order to boost its sales and stabilize its earnings, Syntax Plc.’s management has identified Synapse Chemical Company Plc. as a possible target. Syntax proposed to acquire Synapse for a consideration of N20 million, which was agreed to by both companies.

Synapse’s expected future profits, as projected from its past financial records, are as follows:

Forecast Profits

Year Revenue (N’m) Cost of Sales (N’m) Other Expenses (N’m) Depreciation (N’m) Total Expenses (N’m) Profit Before Tax (N’m)
2015 60 30 15 5 50 10
2016 70 35 15 4 54 16
2017 78 39 15 4 58 20
2018 86 43 15 4 62 24
2019 94 47 15 4 66 28

The following information is relevant:

  1. The forecast profits have been limited to five years.
  2. All sales are for cash.
  3. The net book value of Synapse’s assets of N2 million is intended to be sold for N1 million in 2015. The expected loss from the disposal of these assets has been included in the depreciation for 2015. These assets currently have a tax written down value of N3 million. Capital allowances were claimed as at when due.
  4. Synapse currently has a tax liability of N4.5 million due for payment in 2015.
  5. The interest charges of N1 million of Synapse Plc. have been included in other expenses.
  6. In order to maintain the future earnings forecast of Synapse Chemical Company, Syntax Plc. needs to invest in capital expenditure.

7. Company income tax is currently at 30 percent, and the tax delay is one year.

8. The after-tax weighted average cost of capital has been calculated at 22%.

The management of Syntax Plc. has asked you, as a Financial Expert, to appraise the intended acquisition of Synapse Chemical Company Plc. and advise on the reasonableness of the acquisition. Your advice should be in the form of a report to the Board of Directors of Syntax Plc.

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  • 1 Marks

AAA – Nov 2012 – L3 – AII – Q9 – Audit of Accounting Estimates and Fair Value Measurements (IAS 36, IFRS 13)

Identifies the valuation methods for non-monetary government grants under IAS 20.

IAS 20 deals with Accounting for Government Grants and Disclosure of Government Assistance. In the Standard, a grant in the form of a non-monetary asset may be valued at …………… or …………… value.

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  • 15 Marks

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.

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)

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  • 30 Marks

FM – Nov 2023 – L1 – SA – Q1 – Mergers and Acquisitions

Evaluate Finkex Plc's acquisition strategy of Toba Plc, focusing on share-for-share impact, valuation methods, and shareholder implications.

Finkex Plc (FP) is a listed company that operates in the pharmaceutical sector, manufacturing a broad range of drugs under license in a number of countries along the ECOWAS sub-region. For a number of years, the company has grown organically.

Three years ago, the company acquired 20% of the issued share capital of Toba Plc (TP) for N110 million, as a route to both expansion and diversification. The acquisition was by private negotiation in exchange for an issue of its own shares.

Toba Plc is involved in a different area of the pharmaceutical sector from FP as it is primarily a research-driven company involved in the development of new drugs.

To expedite the realization of its diversification strategy, the directors of FP have now decided to acquire the remaining 80% of Toba’s share capital.

Extracts from the financial statements of Finkex Plc are given below:

Finkex Plc – Extracts from financial statements for the last two years

Year 2023 2022
N’m N’m
Non-current assets (including investment in Toba plc) 602.8 499.4
Current assets 265.0 180.4
Total Assets 867.8 679.8
Current liabilities 199.2 136.8
Total assets less current liabilities 668.6 543.0
Non-current liabilities 149.5 159.4
Net assets 519.1 383.6
Issued share capital (ordinary shares of ₦1 each) 100.0 73.6
Share premium 84.0 12.4
Profit or loss account 335.1 297.6
Total Equity 519.1 383.6
Sales revenue 1320.6 496.0
Earnings after tax 51.50 37.60
Dividend 14.0 14.0
Retained profits 37.5 23.6

All that is known about Toba Plc is that it has 114 million shares in issue; total share capital and reserves are N684 million; earnings after tax in the most recent year were ₦85.2 million on sales of N1,252.0 million, which were double those of the previous year; and that it has an investment valued at N80 million (book and market) in a type of enterprise which might not be of interest to Finkex Plc.

The current stock market prices per share are: Finkex Plc 300k; Toba plc 341k. Both companies pay tax at 50%.

Required:

a. At the above market prices, how many shares of Finkex Plc would have to be issued to buy the rest of Toba Plc on a share-for-share offer? (4 Marks)

b. With regard to earnings and also the book value of assets per share, how would the above share-for-share offer affect the position of:

i. Existing shareholders in Finkex Plc; (6 Marks)

ii. The 80% shareholders in Toba Plc whose shares were to be acquired? (4 Marks)

c. Assuming that the 80% shareholders in Toba Plc were prepared to accept ₦80 million 10% Loan Stock as part of the consideration:

i. What advantages might there be for Finkex Plc in this arrangement? (2 Marks)

ii. What total price could Finkex Plc afford to pay without diluting the earnings per share of its existing shareholders, as calculated in (b) (i) above? (6 Marks)

d. If the board of Toba Plc decided to advise its shareholders not to accept an offer from Finkex Plc, what arguments might they use – including any derived from the financial information available about Finkex Plc?

(8 Marks)

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  • 20 Marks

CR – Nov 2018 – L3 – SB – Q3 – Business Combinations (IFRS 3)

Evaluation of Abana and Doha as potential acquisition targets using adjusted financial ratios.

Banny Plc. (Banny) is a diversified company that has achieved its present size through vertical and horizontal acquisition. The directors have identified two potential target entities for acquisition. The first is Abana Limited (Abana), which operates a cement business near Offa, Kwara State. The second is Doha Limited (Doha), also in the cement industry, located near Oturukpo, Benue State. Banny has obtained copies of their audited financial statements, along with additional information notes.

Statement of Profit or Loss for the Year Ended December 31, 2017

Item Abana (₦’m) Doha (₦’m)
Revenue 136,000 132,000
Cost of sales (84,000) (91,900)
Gross profit 52,000 40,100
Other operating expenses (36,000) (28,000)
Profit from operations 16,000 12,100
Finance costs (6,000) (8,000)
Profit before tax 10,000 4,100
Income tax expense (3,000) (2,000)
Net profit for the period 7,000 2,100

Statement of changes in equity for the year ended December 31, 2017

Statement of financial position as at December 31, 2017

Additional Notes:

  1. Doha revalued its non-current assets for the first time following IFRS adoption on January 1, 2017. Abana maintains its non-current assets at historical cost.
  2. Banny uses the following ratios to evaluate acquisition targets: Return on Capital Employed (ROCE), Gross Profit Margin, Turnover on Capital Employed, and Leverage.

Required:

a. Compute adjustments for the revaluation of property, plant, and equipment, making Abana and Doha comparable for analysis. (14 Marks)

b. Calculate the four ratios (ROCE, Gross Profit Margin, Turnover on Capital Employed, and Leverage) after adjustments. (4 Marks)

c. Advise Banny on the better acquisition target based on adjusted ratios. (2 Marks)

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  • 20 Marks

AFM – Nov 2017 – L3 – Q3 – Valuation of acquisitions and mergers

Calculating the valuation per share for minority and complete takeover of Fasco and Boscan, and discussing limitations of the approach.

Zed Ltd is considering the immediate purchase of some, or all, of the share capital of one of two firms—Fasco Ltd and Boscan Ltd. Both Fasco Ltd and Boscan Ltd have one million ordinary shares issued, and neither company has any debt capital outstanding.

Both firms are expected to pay a dividend in one year’s time—Fasco’s expected dividend amounting to 30p per share, and Boscan’s being 27p per share. Dividends will be paid annually and are expected to increase over time. Fasco’s dividends are expected to display perpetual growth at a compound rate of 6% per annum. Boscan’s dividend will grow at the high annual compound rate of 33⅓% until a dividend of 64p per share is reached in year 4. Thereafter, Boscan’s dividend will remain constant.

If Zed is able to purchase all the equity capital of either firm, then the reduced competition would enable Zed to save some advertising and administrative costs, which would amount to GH¢225,000 per annum indefinitely, and, in year 2, to sell some office space for GH¢800,000. These benefits and savings will only occur if a complete takeover is carried out. Zed would change some operations of any company completely taken over, the details are:

  • Fasco – No dividend would be paid until year 3. Year 3 dividend would be 25p per share, and dividends would then grow at 10% per annum indefinitely.
  • Boscan – No change in total dividends in years 1 to 4, but after year 4, dividend growth would be 25% per annum compound until year 7. Thereafter, annual dividends would remain constant at the year 7 amount per share.

An appropriate discount rate for the risk inherent in all the cash flows mentioned is 15%.

Required:
a) Calculate the valuation per share for a minority investment in each of the firms, Fasco and Boscan, which would provide the investor with a 15% rate of return. (6 marks)

b) Calculate the maximum amount per share which Zed should consider paying for each company in the event of a complete takeover. (8 marks)

c) Comment on any limitation of the approach used in part (a), and specify the other major factors which would be important to consider if the proposed valuations were being undertaken as a practical exercise. (6 marks)

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  • 20 Marks

AFM – Nov 2015 – L3 – Q5 – Valuation of acquisitions and mergers

Evaluate the acquisition of Anas-Expo Clothing Ltd by Two-Pack Fashion Ltd, analyzing its effect on EPS, shareholders' wealth, and sources of conflict.

You are the Finance Manager of a growing clothing company, Two-Pack Fashion Ltd (Two-Pack). Two-Pack has enjoyed significant growth in recent years using an internal growth strategy. Two-Pack is now seeking to acquire other companies to speed up its growth drive. It has identified Anas-Expo Clothing Ltd (Anas-Expo) as a suitable candidate for takeover. Both companies have the same level of risk.

Anas-Expo produces high-quality handmade clothes, with which it has earned several awards. The company has recorded considerable profits in the past, but its output has dwindled over the past two years due to increasing labour costs. Labour unions have pressured policymakers into amending labour regulations, particularly those relating to pensions and minimum wages, to provide more benefits and protection for workers. Directors of Two-Pack believe that production and profitability of Anas-Expo will be enhanced if its production process is mechanized.

Below are summarized financial data for the two companies immediately before acquisition:

Two-Pack (GHS’m) Anas-Expo (GHS’m)
Sales revenue 285.8
Net operating income 85.8
Interest charges 14.2
Net income before tax 71.6
Corporate tax 15.8
Net income after tax 55.8
Dividends 22.3
Addition to retained earnings 33.5

Two-Pack has 40 million shares and a P/E ratio of 18, while Anas-Expo has 25 million shares and a P/E ratio of 12. Directors of Two-Pack have decided that Two-Pack takes up all the equity shares in Anas-Expo by offering to its shareholders one new share for every share they hold. They have also decided that Two-Pack mechanizes Anas-Expo’s production process immediately at the cost of GHS18 million, replacing work currently done by hand. It is estimated that operational efficiency arising from the acquisition and integration of the two companies would yield after-tax benefits of GHS25 million per year to perpetuity. The cost of capital of Two-Pack is 25%.

Required:

(a) Evaluate the acquisition proposal, and recommend whether the acquisition should go ahead.
(b) Analyze the effect of the acquisition on the earnings per share (EPS) of Two-Pack following the successful acquisition of Anas-Expo.
(c) Analyze the effect of the acquisition on the wealth of the shareholders of each company.
(d) Advise the directors of Two-Pack on three likely sources of conflict in relation to the acquisition of Anas-Expo and the mechanization of its production process, and suggest ways through which the conflict could be avoided or resolved.

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  • 12 Marks

AFM – Nov 2018 – L3 – Q3b -Valuation and use of free cash flows

Estimate the value of the firm and its equity using the FCFF and FCFE valuation approaches and calculate the value per share.

DoGood Ltd is evaluating Phinex Ltd using the Free Cash Flow to the Firm (FCFF) and Free Cash Flow to Equity (FCFE) valuation approaches.

DoGood Ltd has gathered the following information (in current Ghana Cedis terms):

  • Phinex Ltd has net income of GH¢250 million, depreciation of GH¢90 million, capital expenditures of GH¢170 million, and an increase in working capital of GH¢40 million.
  • Phinex Ltd will finance 40% of the increase in net fixed assets (capital expenditures less depreciation) and 40% of the increase in working capital with debt financing.
  • Interest expenses are GH¢150 million. The current market value of Phinex’s outstanding debt is GH¢1,800 million.
  • FCFF is expected to grow at 6.0% indefinitely, and FCFE is expected to grow at 7.0%.
  • The tax rate is 30%.
  • Phinex Ltd is financed with 40% debt and 60% equity. The before-tax cost of debt is 9% and the before-tax cost of equity is 13%.
  • Phinex Ltd has 10 million outstanding shares.

Required:
i) Using the FCFF valuation approach, estimate the total value of the firm, the total market value of equity, and the value per share.
(6 marks)

ii) Using the FCFE valuation approach, estimate the total market value of equity and the value per share.
(6 marks)

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  • 10 Marks

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.

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)

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  • 15 Marks

CR – Nov 2018 – L3 – Q3 – Business valuations

Identify valuation factors, determine share value using the net assets approach, and prepare the consolidated financial statement for GCC Bank Ltd after the takeover of Wunam Bank Ltd.

The shareholders of Wunam Bank (Ghana) Limited have decided to sell the company to GCC Bank (Ghana) Limited following their inability to recapitalize the company as demanded by the Bank of Ghana. The statement of financial positions of the two banks as at 31 March 2018 are given below.

Additional Information:

  1. Wunam Bank Ltd carries a huge non-performing loan portfolio. It is estimated that only 40% of the outstanding loans are recoverable.
  2. Investments represent 91-Day Treasury Bills held as secondary reserves. An audit has shown that the investments were overstated in 2017, as interest on investments for that year amounts to GH¢4.15 million.
  3. Other assets include long outstanding debits amounting to GH¢3.6 million, which are not represented by tangible assets.
  4. Deposits amounting to GH¢3.75 million could not be accounted for. This phenomenon has prevailed since 2014 but has not been provided for in the accounts.
  5. Property, Plant & Equipment includes an old banking software amounting to GH¢1.25 million, considered worthless. The remaining tangible fixed assets have been revalued at GH¢15.3 million.
  6. Cash and balances with other banks include GH¢2.4 million due from Sakara Rural Bank Ltd, which was liquidated in 2016.
  7. Other liabilities include interest earned on investments amounting to GH¢3.15 million.
  8. Goodwill was assessed at 2.5% of adjusted deposits and current accounts.
  9. Wunam Bank Ltd has invested in Government bonds worth GH¢12.6 million as at 31 March 2018 to fund new ATMs and branches.

Required: a) Identify FOUR (4) factors you would consider in determining the value to be placed on assets when using the net assets approach to valuation of Wunam Bank Ltd.
(4 marks)

b) Determine the value to be placed on the shares of Wunam Bank Ltd using the net assets approach to valuation.
(5 marks)

c) Prepare the statement of financial position of GCC Bank Ltd after the takeover using your answer in (b). Assume the following:

  • The purchase consideration was duly settled.
  • GCC Bank Ltd took over all assets and liabilities.
  • Goodwill was written off.

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You're reporting an error for "CR – Nov 2018 – L3 – Q3 – Business valuations"

  • 15 Marks

CR – Mar 2024 – Q4a – Business valuation

Apply various valuation methods to determine the value of Meddy Ltd's shares in a potential merger scenario with Flossybeats Ltd.

Flossybeats Ltd is a major competitor of Meddy Ltd in the telecommunication industry. Flossybeats Ltd is listed on the Ghana Stock Exchange with a P/E ratio of 11 and a dividend yield of 7.2%. Directors of Flossybeats Ltd have been presented with a proposal to merge with Meddy Ltd which owns 45% of the market share but not yet listed. The summarized financial statements of Meddy Ltd for the year 2023 are given below:

Statement of Financial Position as at 31 December 2023

Additional information: i) An existing property included in property, plant and equipment with a carrying value of GH¢675,000 could be developed as a site for residential use at a cost of GH¢75,000 and would then be worth GH¢975,000. The remaining property, plant and equipment can be used to generate a net cashflow of GH¢300,000 each year for the foreseeable future.

ii) The worth of the Investment Property is difficult to value, as there is no active market. A normal sale in the present condition could be reasonably expected to yield GH¢600,000 based on an analysis of transactions in similar assets.

iii) The trademark represents a license to produce and sell a special product which is expected to generate an after-tax profit of GH¢1,500,000 over the next four years. The expected after-tax profit projection was made without the consideration of amortisation of the book value of the trademark over the same period.

iv) The discounted present value of future cash payments in respect of long-term loan is GH¢975,000. The discount rate of Meddy Ltd is 25% per annum but the financial controller asserts that beta of the company is 1.5. The Treasury bill rate and the return on the market are estimated to be 16% and 23% respectively.

v) Dividend payments of Meddy Ltd in 2022 was GH¢112,500. The dividend growth achieved in 2023 is expected to be sustained in the foreseeable future.

Required: Advise the directors of Meddy Ltd on the value to be placed on the ordinary shares using:

  • Net Assets Method
  • Constant Dividend Method
  • Dividend Growth Method
  • Earning based (P/E) Method

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  • 3 Marks

CR – Aug 2022 – L3 – Q4a – Business Valuation

This question requires identifying three factors that influence the value of the Price-Earnings (P/E) ratio in business valuation.

When acquiring an unquoted company in a takeover bid, the final price will be agreed by negotiation. However, the crucial role of the price-earnings ratio in arriving at the final price cannot be overemphasized.

Required:
State THREE (3) factors that are likely to influence the value of the price-earnings ratio.

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  • 15 Marks

CR – July 2024 – L3 – Q4a – Business Valuation

Determine a range of values for Alomo's equity in Bediako Metals Ltd using three valuation bases: Net assets, Earnings, and Dividend yield.

Question:

Alomo Investments and Financial Services (Alomo) is a locally based investment portfolio firm which holds several financial assets across different industries in Ghana. Alomo holds some equity assets in Bediako Metals Ltd (Bediako). Currently, Alomo is preparing its financial statements and would like to know the fair value of its current year-end 20% equity holdings in Bediako based on the latter’s recently available financial data (for the year ended 31 December 2021) provided below:

Items GH¢ million
Tangible assets 895
Non-current financial assets 150
Current assets 485
Total liabilities (including all redeemable preference share capital) 750
Irredeemable preference share capital 100
Draft profit after tax 170

Additional information:

  1. At year-end, the entity had to make a downward revision of decommissioning provision relating to one of its plants as both the expected cash outflows and the current-market rate discount rate were reassessed. Reduction of GH¢40 million (appropriately discounted) has been used to revise the liability and same credited to profit or loss.
  2. Bediako holds some 3-year bonds which are measured at fair value through other comprehensive income. Coupon and effective interest rates, which are the same, have been correctly dealt with. The carrying value of these bonds is GH¢92 million, and the bonds are yet to be revised to reflect their year-end fair value. For the purpose of obtaining the appropriate fair value in line with IFRS 13: Fair value measurement, the following information has been obtained:
Reference to most advantageous market GH¢ million
Quoted market prices 120
Quoted market prices (with minor adjustment) 85
Based on own model 140
  1. The directors of Bediako Ltd have refused to agree with their external auditors to a reduction in the year-end inventory value for the firm’s main product. As a result, the auditors have issued a qualified opinion on the financial statements. The items in question are being included in current assets at the cost of GH¢200 million. The auditors noted during their subsequent event procedures that 90% of these items had been sold for 95% of their cost.
  2. The directors also failed to cooperate with the Finance Director (FD) over how the issued 5-year bonds should be accounted for. The FD’s position is that, though the firm has clear intention to pay all interests and principal on the bonds to the bondholders, such treatment would result in a very huge measurement mismatch. Hence, the fair value option should be taken. Taking that option would have created a fair value gain on the bond by GH¢12 million (including a credit-worthiness element of GH¢5 million).
  3. On 30 June 2021, Bediako Ltd made an issue of 30 million new ordinary shares to a venture capital firm to raise GH¢120 million. Later, on 1 November 2021, the entity also made a capitalisation issue on the basis of one new share for every four shares held at that time. Bediako has correctly accounted for these issues in its financial statements. Its total number of ordinary shares outstanding as at 31 December 2021 was 200 million.
  4. Ordinary dividends for the current period, when compared to the draft profit attributable to ordinary shareholders, translate into a dividend cover of 5:1. The following details relate to preference dividends paid by Bediako during the current year:
Class of shares Type of dividend GH¢ million
Irredeemable preference shares (non-cumulative) Final 10
Redeemable preference shares (non-cumulative) Final 15

Bediako has correctly accounted for these dividends.

  1. A comparable listed firm provides a price/earnings ratio of 12 and dividend yield of 4%. A risk factor of 20% should be assumed.

Required:
Determine a range of values for Alomo’s equity investment in Bediako using the following bases:
i) Net assets basis
ii) Earnings basis
iii) Dividend yield basis

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  • 15 Marks

CR – Dec 2022 – L3 – Q4a – Business Valuation

Valuation of Kudus Ltd using Net Asset, Price/Earnings, and Dividend Yield methods for acquisition purposes.

Kudus Ltd (Kudus) is an unlisted agro-processing company which operates locally within the Middle Belt. Amartey Mutual Funds Ltd has identified Kudus as a target firm and would like to estimate its worth for the purpose of acquisition.

The following financial summaries relate to Kudus as at 31 March 2022:

Description GH¢ million
Non-current assets 150
Current assets 145
Ordinary shares (@ GH¢1.5) 30
20% Preference shares 10
Non-current liabilities 50
Current liabilities 110
Profit after tax (Draft) 38

Number of authorised ordinary shares: 30 million

Additional information:

  1. Kudus has the following ordinary dividends:
Description GH¢ million
Announced on 15 March 2021 but declared on 10 April 2021 2.5
Declared on 30 June 2021 but paid on 31 July 2021 1.5
Announced on 25 March 2022 but declared on 5 April 2022 2

Kudus has correctly accounted for ordinary dividends in the financial statements.

  1. The preference shares are irredeemable.
  2. Due diligence was carried out on Kudus as at 12 April 2022 and the following were identified which may necessitate the revision of the draft profit:
    • Non-current assets include Kudus’s office building with a carrying value of GH¢95 million. The building is estimated to have a fair value of GH¢160 million if used for rental purposes, and GH¢180 million if used for industrial purposes. The rental value is before considering substantial rework required to be carried out on the property. The location of the property currently makes it legally impermissible to use it for industrial activities. The market value of the building in its current use is estimated at GH¢120 million. A plant with a carrying value of GH¢10 million is not in usable condition but could be scrapped for GH¢2 million. The value of the remaining plant and equipment has not changed.
    • Non-current assets of Kudus include a four-year secured debenture carried at its year-end amortised cost. No allowance was made for credit losses against this investment as the directors believed that the investment was exposed to only minimal risk of default. At year-end, allowance based on lifetime expected credit loss was estimated at GH¢1.8 million while allowance for next-12 months’ expected credit loss was assessed at GH¢1 million.
    • The current assets include an amount due from a customer totalling GH¢20 million which has been outstanding for the last two years due to a dispute with the customer. No provision was made in relation to this. The auditors have qualified the audit report to this effect. With several follow-up activities, the customer as at 31 March 2022 has agreed to pay GH¢8 million at 31 March 2023 and GH¢4 million at 31 March 2024. However, Kudus has decided to file a case against the customer to recover the entire amount due by 31 March 2025.
    • Non-current liability represents three-year 5% GH¢50 million loan notes issued on 1 April 2021 at nominal value when their effective interest rate was 7% because of a large premium at redemption. Kudus has taken the “fair value option” for these notes. At 31 March 2022, fair value of the notes based on a widely used valuation model is GH¢47 million and based on inputs drawn from a vibrant market is GH¢49 million. No fair value change is attributable to Kudus’s own credit risk. Coupon has been paid and charged to income statement.
  3. The following details relate to Bukari Plc, a listed firm which operates in the same sector as Kudus:
Indicators Ratio
Dividend cover 4
Yield on earnings 12.5%
Annual sales growth (over last 5 years) 18%
Annual earnings growth (over last 5 years) 17%
  1. Assume discount rate of 10% and unlisted firm risk factor of 20%.

Required:

Determine a range of values for each ordinary share of Kudus using:

i) Net Assets basis.
(6 marks)

ii) Price/Earnings basis.
(5 marks)

iii) Dividend Yield basis.
(4 marks)

(Note: Ignore tax implications)

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  • 4 Marks

MA – April 2022 – L2 – Q5B – Introduction to management accounting

Explain four reasons why organizations need to measure costs, including valuation, profit measurement, decision making and control.

Cost measurement reflects the relationships between inputs and outputs. It is designed to provide more accurate information about production, support activities and product cost so that management can focus its attention on the products and processes with the most leverage for increasing profits.

Required:

Explain FOUR (4) reasons why organisations need to measure cost. (4 marks)

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