- 15 Marks
Question
Aderupoko Plc (ADP), a large listed media group, has been the holding company of Adamu Publishers Limited (APL) since 2015. The publishing company (APL) is 100% owned by ADP since inception.
Recently, the directors of APL informed ADP’s board of their readiness to make a management buy-out (MBO) of APL. Accordingly, ADP’s board decided to value APL using the shareholder value analysis method (SVA). ADP’s board estimates that APL has a four-year competitive advantage over its competitors (to 30 September 2024) and the following data regarding APL’s value drivers and additional financial information has been collected:
| Year to 30 September | 2021 | 2022 | 2023 | 2024 | 2025+ |
|---|---|---|---|---|---|
| Sales growth (%) | 5% | 4% | 3% | 2% | 0% |
| Operating profit margin | 8% | 9% | 10% | 10% | 10% |
| Incremental non-current asset investment (% of sales increase) | 5% | 6% | 3% | 2% | 0% |
| Incremental working capital investment (% of sales increase) | 6% | 5% | 4% | 4% | 0% |
Financial Information:
- Sales for the current year to 30 September 2020: ₦80 million
- Annual depreciation (equal to annual replacement of non-current asset expenditure): ₦2.0 million
- Par value of 6% debentures in issue (current market value ₦95.00, nominal value ₦100): ₦10.0 million
- Short-term investments held: ₦0.8 million
- Company tax rate: 20%
- Current WACC: 10%
Required:
a. Calculate the value of APL’s equity using SVA.
(12 Marks)
b. Outline three methods by which APL’s directors might raise the funds necessary for the proposed MBO of the company. (3 Marks)
(Total 15 Marks)
Answer
a. Calculation of APL’s Equity Using SVA:
Workings for SVA Calculation:
| Year | 1 | 2 | 3 | 4 | 5 – Infinity |
|---|---|---|---|---|---|
| Sales | ₦84.00 | ₦87.40 | ₦90.00 | ₦91.80 | ₦91.80 |
| Operating Profit | ₦6.72 | ₦7.87 | ₦9.00 | ₦9.18 | ₦9.18 |
| Tax at 20% | (₦1.34) | (₦1.57) | (₦1.80) | (₦1.84) | (₦1.84) |
| Depreciation | ₦2.00 | ₦2.00 | ₦2.00 | ₦2.00 | ₦2.00 |
| Operating Cash Flow | ₦7.38 | ₦8.30 | ₦9.20 | ₦9.34 | ₦9.34 |
| Replacement Non-current Assets | (₦2.00) | (₦2.00) | (₦2.00) | (₦2.00) | (₦2.00) |
| Capital Expenditures | (₦0.20) | (₦0.20) | (₦0.08) | (₦0.04) | – |
| Working Capital | (₦0.24) | (₦0.17) | (₦0.10) | (₦0.07) | – |
| Free Cash Flow | ₦4.94 | ₦5.93 | ₦7.02 | ₦7.23 | ₦7.34 |
Present Value Calculation:
| Year | 1 | 2 | 3 | 4 | 5 – Infinity |
|---|---|---|---|---|---|
| PV Factor @ 10% | 0.909 | 0.826 | 0.751 | 0.683 | 6.830* |
| PV (₦m) | ₦4.49 | ₦4.89 | ₦5.27 | ₦4.94 | ₦50.10 |
Total PV = ₦69.69 million
Add short-term investments = ₦0.80 million
Less market value of debentures (₦10 million × 95/100) = (₦9.50 million)
Total Value of Equity = ₦60.99 million
(*Annuity factors at 10% years 5 – infinity)
b. Methods for Funding the MBO:
- Private Loan: Team members use unsecured and secured personal loans to fund the MBO, possibly using their assets as collateral.
- Business Loan: A business loan may be obtained from a bank or finance company, potentially secured against the assets of APL.
- Asset Finance: The company’s substantial assets, such as property or receivables, can be used as collateral for borrowing, commonly referred to as a leveraged buy-out.
- Tags: Competitive Advantage, Equity, Funding Methods, MBO, SVA, Valuation
- Level: Level 3
- Topic: Business Valuation Techniques
- Series: NOV 2022
- Uploader: Dotse