Topic: Business valuations

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FM – Nov 2024 – L2 – Q4a – Business Valuation

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

Question

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.

Answer

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Tags: Business Valuation, Discounted Cash Flow, Financial Modelling, Price-Earnings ratio, Price-to-Book Ratio, Price-to-Sales Ratio
Level: Level 2

Topic: Business valuations
Series: Nov 2024

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.

Question

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%.

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

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

Answer

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Tags: Business Valuation, Discounted Cash Flow, Dividend Yield, Net Asset Valuation, Price-Earnings ratio, Share Valuation
Level: Level 3

Topic: Business valuations
Series: NOV 2020

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.

Question

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)

Answer

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Tags: Adjustments, Business Valuation, Earnings Yield, Financial Statements, IPO, Net Assets
Level: Level 3

Topic: Business valuations
Series: MAY 2019

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.

Question

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:

Wunam Bank Ltd carries a huge non-performing loan portfolio. It is estimated that only 40% of the outstanding loans are recoverable.
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.
Other assets include long outstanding debits amounting to GH¢3.6 million, which are not represented by tangible assets.
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.
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.
Cash and balances with other banks include GH¢2.4 million due from Sakara Rural Bank Ltd, which was liquidated in 2016.
Other liabilities include interest earned on investments amounting to GH¢3.15 million.
Goodwill was assessed at 2.5% of adjusted deposits and current accounts.
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.

Answer

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Tags: Bank Valuation, Consolidation, Financial Reporting, Takeover, Valuation
Level: Level 3

Topic: Business valuations
Series: NOV 2018

CR – Nov 2021 – L3 – Q4a – Business valuations

Determine the value of shares of Aboto Ltd using multiple valuation methods including net assets, price-earnings ratio, dividend yield, and discounted cash flow

Question

Aboto Ltd is a private company in the printing industry. It was established by the Aboto family some twenty years ago with Mrs. Aboto as the Managing Director. The business has grown in size over the years, and the directors are now considering listing the company on the Ghana Stock Exchange. The financial statements of the company for the year 2020 are given below:

Additional Information:

The Share Capital of Aboto Ltd consists of ordinary share capital of no par value issued at GH¢100 per share.
An independent valuer estimated the fair value of the Property, Plant & Equipment at GH¢500,000. Valuation charges of 2% have not been accrued for in the above accounts.
The inventory includes obsolete items worth GH¢5,000 being held despite persistent advice by the auditors to have them written off.
Receivables include an amount of GH¢12,000 resulting from the bankruptcy of a major customer. Aboto Ltd is not likely to realize any amount from this, but the directors have refused to make any provision.
The patents represent a right to sell a special product. This product is expected to generate cash flows of GH¢2,000 per annum indefinitely.
The discounted present value of future cash payments in respect of the debentures is GH¢20,000.
Profits after tax of Aboto Ltd over the past four years were as follows:

Year Profits (GH¢)

2019 38,000

2018 36,000

2017 32,000

2016 30,000
A corporate plan prepared by the directors of Aboto Ltd in 2018 included the following positions:
The price-earnings ratio and a dividend yield of quoted companies in the same industry Aboto Ltd operates are 8 and 4%, respectively.
The net assets of Aboto Ltd as at 31 December 2019 were GH¢251,100.
The cost of capital of Aboto Ltd is 20%.
Investing in unlisted securities is about 20% more risky than investing in listed securities.

Year	Profits (GH¢)
2019	38,000
2018	36,000
2017	32,000
2016	30,000

Required:

Determine the value to be placed on each share of Aboto Ltd using the following methods of valuation:

i) Net assets (4 marks)
ii) Price-earnings ratio (4 marks)
iii) Dividend yield (3 marks)
iv) Discounted cash flow (4 marks)

Answer

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Tags: Discounted Cash Flow, Dividend Yield, Equity Valuation, Financial Statements, Net Asset Valuation, Price-Earnings ratio, Share Valuation
Level: Level 3

Topic: Business valuations
Series: NOV 2021

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.

Question

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;

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

Answer

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Tags: Business Valuation, Dividend Yield Method, Financial Statements Analysis, Net Assets Method, Price-Earnings ratio
Level: Level 3

Topic: Business valuations
Series: MAY 2016

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.

Question

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:

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.
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.
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.
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.
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%
The company’s cost of capital is 25%.
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)

Answer

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Tags: Asset Valuation, Business Valuation, Dividend valuation, Earnings valuation, Financial Statements Analysis, P/E Ratio
Level: Level 3

Topic: Business valuations
Series: NOV 2023

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.

Question

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

Answer

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Level: Level 3

Topic: Business valuations
Series: MAR 2024

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.

Question

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:

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.
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.
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.)

Answer

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Tags: Business Valuation, Dividend Growth, Net Assets, Price/Earnings
Level: Level 3

Topic: Business valuations
Series: AUG 2022

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.

Question

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.

Answer

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Tags: Investment decisions, Market Sentiment, Price-Earnings ratio, Valuation
Level: Level 3

Topic: Business valuations
Series: AUG 2022

FM – April 2022 – L2 – Q2 – Business valuations | Mergers and acquisitions

Evaluate the possible prices for Blanco Ltd to offer for Zinko using three valuation methods, discuss the issues Zinko may have with these methods, and outline benefits to Blanco Ltd from the acquisition.

Question

Blanco Ltd is listed on the Ghana Stock Exchange (GSE) and is also included in the Ghana club 500 companies. In its recently published accounts, the directors indicated that as part of their growth strategy, the company is negotiating to take over the business of Zinko Enterprise (Zinko), a start-up business in the industry.

Blanco Ltd has in issue 2,480,000 ordinary shares with each share earning approximately GH¢0.79 to give a Price-Earnings ratio of 8. Shareholders expected rate of return is 18%.

The books of Zinko also show that the company has in issue 1,456,000 ordinary shares. The Company’s earnings have increased significantly in the last 4 years from GH¢300,000 to GH¢455,000. The dividend pay-out ratio has been consistent at 45% as a strategy to pay enough funds to shareholders and generate internal resources for future expansion projects. Shareholders expected rate of return is 20%.

Blanco Ltd has estimated that upon completion of the acquisition, the Zinko line of business would generate annual cashflow of GH¢682,500 in the first year, and after that grow at an annual rate of 5% into perpetuity. The investment required for the acquisition will be GH¢1,230,000. However, the funds for this investment would be raised at a cost of capital of 20%.

Required:
a) Use the following valuation methods to estimate the possible prices that Blanco Ltd can offer for the acquisition of Zinko:
i) Price-Earnings ratio
ii) Dividend growth model
iii) Discounted Cashflow (12 marks)

b) Discuss TWO (2) key issues that Zinko management may have with each of the valuation methods used above. (6 marks)

c) Discuss FOUR (4) possible benefits that will accrue to Blanco Ltd if it acquires Zinko. (2 marks)

Answer

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Tags: Acquisition benefits, Business valuations, Company acquisition, Discounted Cash Flow, Dividend growth model, Price-Earnings ratio, Valuation methods issues
Level: Level 2

Topic: Business valuations, Mergers and acquisitions
Series: APR 2022

FM – NOV 2021 – L2 – Q2 – Business valuations | Mergers and acquisitions

Valuation analysis and recommendation for Mr. Asare Jones on offers received for his unlisted company, including a comparison between company value and market capitalisation.

Question

Mr. Asare Jones inherited the Mindsworth Textile Company Ltd (Mindsworth), an unlisted company, from his Father. The company has 1,000,000 shares which are solely owned by Mr. Asare Jones. For the past five years, profits have fallen below the industry average, with a growth rate of only 2%, while the industry average is more than twice this rate.

Mr. Asare Jones has been approached by Indiana Textiles Ltd (Indiana), a competitor, with a bid to take over the assets and liabilities of Mindsworth in exchange for 800,000 shares in Indiana. The shares would add up to Indiana’s existing 7,200,000 shares. Indiana’s shares are currently valued at GH¢9.50 per share.

Meanwhile, Obiba Management Associates (OMA), a corporate finance consultancy firm, has offered GH¢3,000,000 to take up 49% of the shares of Mindsworth and grow the company’s current earnings of GH¢850,000 per the last financial year by 5% in the first three years and after that, 3% into perpetuity.

Mr. Asare Jones, after assessing the risks associated with the various options, has revised his current expected rate of return of 15%. This is to increase by three percentage points for the offer from Indiana and five percentage points for the offer from OMA.

Required:
a) With appropriate computations, advise Mr. Asare Jones on the following:
i) The benefits and risks associated with each of the options available, including not accepting any of the offers. (12 marks)
ii) Advise on the best option to take. (2 marks)

b) Distinguish between the value of a company and the market capitalisation of a company. (3 marks)
c) Explain THREE (3) challenges Mr. Asare Jones will face with the valuation of his unlisted company in the textile industry. (3 marks)

Answer

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Tags: Acquisition, Market Capitalisation, Risk Assessment, Unlisted Companies, Valuation
Level: Level 2

Topic: Business valuations, Mergers and acquisitions
Series: NOV 2021

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.

Question

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)

Answer

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Tags: Business Valuation, Dividend Yield, Net Asset Value, P/E Ratio
Level: Level 2

Topic: Business valuations
Series: NOV 2017

FM – MAY 2018 – L2 – Q5 – Business valuations

Explains the degrees of stock market efficiency and involves calculating the value of a company based on expected earnings and discussing the limitations of using the P/E method for valuation.

Question

a) The directors of Clear Tel Ltd, a private telecommunication company, are considering a proposed resolution for converting the company to a public company and listing its equity stock on the stock exchange. The directors expect that the stock market listing can enhance Clear Tel’s ability to raise large amounts of capital from the public. However, they fear that stock market inefficiencies could have a negative effect on the price of Clear Tel’s equity stock.

Required:

Explain the THREE degrees of stock market efficiency, and how the price of Clear Tel is expected to move in each case.
(6 marks)

b) Restwell Ltd, a hotel leisure company, is currently considering taking over a smaller private limited company, Staygood Ltd. 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:

The company’s earnings yield is 12%.

Required:

i) As a Finance Manager, calculate the value of the company based on the present value of expected earnings.
(6 marks)

ii) Explain THREE problems associated with using the P/E method for valuing firms.
(3 marks)

Answer

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Tags: Business Valuation, Earnings Yield, Efficient Market Hypothesis, P/E Ratio, Stock Market
Level: Level 2

Topic: Business valuations
Series: MAY 2019

FM – NOV 2018 – L2 – Q5 – Business valuations

Involves calculating a range of valuations for an unquoted company using earnings and P/E ratios, and calculating the market value of bonds based on the cost of debt

Question

a) Flue Ltd wishes to make a takeover bid for the shares of Donc Ltd, an unquoted company. The earnings of Donc Ltd over the past five years have been as follows:

Year	Earnings (GH¢)
2013	40,000
2014	57,600
2015	54,400
2016	56,800
2017	60,000

The average P/E ratio of quoted companies in the industry in which Donc Ltd operates is 10. Quoted companies that are similar in many respects to Donc Ltd are:

Beans Ltd has a P/E ratio of 15 but is a company with very good growth prospects.
Wash Ltd has had a poor profit record for several years and has a P/E ratio of 7.

Required:

Calculate a suitable range of valuations for the shares of Donc Ltd.
(9 marks)

b) Food Ltd has in issue 12% bonds with a par value of GH¢150,000 and a redemption value of GH¢165,000, with interest payable quarterly. The cost of debt on the bonds is 8% annually and 2% quarterly. The bonds are redeemable on 30 June 2021, and it is now 31 December 2017.

Required:

Calculate the market value of the bonds.
(6 marks)

Answer

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Tags: Bond Valuation, Business Valuation, Cost of Debt, Earnings, P/E Ratio
Level: Level 2

Topic: Business valuations
Series: NOV 2018

FM – MAY 2019 – L2 – Q5b – Business valuations | Dividend Policy

Identify and explain the weaknesses of the dividend growth model as a method for valuing companies.

Question

Question:
The dividend growth model also has its fair share of criticism. While some have hailed it as being indisputable and not subjective, recent academicians and practitioners have come up with arguments that make you believe the exact opposite. Recent studies have unearthed some glaring flaws in what was considered to be a perfect valuation model.

Required:
Identify and explain THREE (3) weaknesses of the dividend growth model as a way of valuing a company with shares. (6 marks)

Answer

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Tags: Corporate finance, Dividend growth model, Valuation
Level: Level 2

Topic: Business valuations, Dividend Policy
Series: MAY 2019

FM – NOV 2015 – L2 – Q1b – Business valuations

Compute and comment on common size ratios for Suncity Limited for the years 2013 and 2014.

Question

The Board of Directors of Suncity Limited are reviewing the performance of their business for the year 2014 and are considering using ratio analysis for this purpose. You have been presented with the following statement of comprehensive income for the years 2013 and 2014:

	2014 (GH₵’000)	2013 (GH₵’000)
Sales	42,000	30,000
Less: cost of sales	33,200	21,500
Gross profit	8,800	8,500
Operating expenses	2,750	2,120
Profit before finance charges	6,050	6,380
Finance charges	500	700
Profit before tax	5,550	5,680
Taxation	1,110	1,136
Profit after tax transferred to income surplus	4,440	4,544

Required:
i. Compute common size ratios for Suncity Limited for 2013 and 2014 (4 marks)
ii. Comment on any four of the ratios computed (2 marks)

Answer

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Tags: Common Size Ratios, Financial Performance, Ratio Analysis, Vertical Analysis
Level: Level 2