SLEEP IS FOR THE WEAK

ICAG LEARNING PARTNER

SPECIALISED ENTRIES &

ACCOUNTS

Lecture Note 10

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 SHARE / BUSINESS VALUATION

Introduction

Normally shares of quoted companies are valued as per open market valuation at the stock
Exchange. For a listed company, the value is the market capitalization, which is the market price
share multiplied by the number of shares in issue. However, where there is a take-over bid and the
offer price is in excess of the current market price of the shares, it implies that the shares have been
valued.

Reasons for Share / Business Valuation

Share valuation is typical of unquoted companies and it takes place when:

1. The company wishes to go public and get listed on the exchange and therefore must ascertain an
issue price for the share issue;
2. There is a scheme of merger and each company’s shares must be assessed;
3. Shares are being sold;
4. Shares are being pledged as collateral for a loan
5. Shares and businesses are valued for tax purposes, (Tax legislation dictates that a business will
have to be revalued for the purpose of Gift tax and Capital gain tax).

Methods of Valuing Shares

The most common methods of valuing shares are as follows:

1) Earnings based Methods

a. Earnings yield or P/E Method
b. Accounting Rate of return’
c. Discounted Cash flow method

2) Dividend based
a. Constant dividend
b. Dividend growth model

3) Asset Based Methods

a. Book Values Method
b. Deprival Value Method
c. Liquidated value Method

4) Others
Super Profit Method
Capital Asset Pricing Model (CAPM)

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However, we will narrow our discussions to the following five methods of valuations:

i. Earnings Yield Method

ii. Dividend Yield Method
iii. Price / Earnings Method
iv. Discounted Cash flows Method
v. Net Asset Method

THE EARNINGS YIELD / PRICE EARNINGS METHOD

This method is appropriate in valuing a controlling interest in a company where the owner can
decide on dividend retention policy.

Earning Yield Method

𝐸𝑎𝑟𝑛i𝑛𝑔𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 (𝐸𝑃𝑆)
Earnings Yield =
𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟i𝑐𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 (𝑀𝑃𝑆 )

Implies that Market Price per share = 𝐸𝑎𝑟𝑛i𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

𝐸𝑎𝑟𝑛i𝑛𝑔𝑠 𝑌e𝑒𝑙𝑑

Price Earnings Ratio Method

𝑀𝑎𝑎𝑟𝑘𝑒𝑡 𝑝𝑟i𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
Price Earnings Ratio =
𝐸𝑎𝑟𝑛i𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Implies that Market price per share = P/E Ratio x Earnings per share

DIVIDEND YIELD METHOD

This method is appropriate for the valuation of small shareholding in unquoted companies. It is
based on the principle that small shareholders are mainly interested in dividends since they cannot
control decisions affecting the company’s profits and earnings. A suitable offer price would be one
which compensates them for the future dividends they will be given up if they sell their shares.

The dividend yield is defined as: 𝐷𝐸𝑣i𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

𝑚𝑎𝑟𝑘𝑒𝑡 𝑝𝑟i𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Implies that Market Price per share = 𝐷i𝐸𝑣i𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

𝐷𝐸𝐸𝑣i𝑑𝑒𝑛𝑑 𝑌𝐸𝐸𝑒𝑙𝑑

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Example 1

The following are extract from the financial statement of Tobinco Ghana Ltd (Unlisted) and
Ayrthon Drugs Ghana Ltd (Listed).

Tobinco Ltd Ayrthon Drugs

Number of Ordinary shares 100,000 200,000

Profit after tax 50,000 70,000
Market Price - GHȻ2 / share
Assume a risk factor of 20%

Required:

Calculate the Market Price per share of Tobinco.

Example 2

Tobinco Ghana ltd is an unlisted company who is seeking to float shares to the public. The
Company has engaged you as a consultant to help calculate the market price per share. It has
provided you with extract from it financial statement and comparable figure from a similar but listed
company, Ayrthon Drugs Ltd.

Tobinco Ayrthon Drugs

Profit after tax 20,000 30,000

Retained Earnings 20% 40%
No. of Ordinary shares 100,000 120,0000
Risk factor 30% -

Required:

Calculate the Market Price per share using the following methods

a. Earnings Yield
b. Dividend Yield
c. Price / Earnings Ratio

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DISCOUN TED CASH FLOWS

This method of share valuation may be appropriate when one company intends to buy the assets of
another company and to make further investments in order to improve profits in future. This method
has some practical difficulties especially, with predicting future cash flows and choosing the
appropriate discount rates.

Example 3
Wide Ltd wishes to make a bid for Narrow Ltd. Narrow Ltd makes after –tax profits of
GHȻ12,000m a year. Wide Ltd believes that if further money is invested in Narrow Ltd the after tax
cash flows (ignoring the purchase consideration) could be as follows:
GHȻ
Year 0 (30,000)
1 6,000
2 18,000
3 30,000
4 45,000
5 45,000
The after tax cost of capital of Wide Ltd is 30% and the company expect all its investments to pay
back in discounted terms within 5 years.

Required:
What is the Maximum price that the company would be willing to pay for the shares of Narrow Ltd

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THE NET ASSET METHOD

Under this method, the value of a share is equal to the value of net tangible assets divided by the
mumber of shares. Intangible assets should be excluded unless they have a market value (e.g.
patents or copyrights which could be sold).
The difficulty with this basis is establishing the net asset values to use. Values should be realistic.
The figure attached to an asset may vary considerably depending on whether it is valued on a going
concern or break-up basis.

Example 4
The following is the summarized statement of financial position of ABC Ltd as at 31st December,
2013. GHȻ
Property, Plant and Equipment 200,000
Net Current Assets 60,000
260,000
Stated Capital (200,000 equity shares) 100,000
Income Surplus 120,000
220,000
20% Debenture 40,000
260,000
Additional Information:
Current value of a property (included in the PPE) exceeds book value by GHȻ40,000. Obsolete raw
materials included in inventories at GHȻ4,000 and included in receivables is irrecoverable amount
of GHȻ6,000.

Required: Determine the value of a share using the net asset basis.

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TUTORIAL QUESTIONS
Question 1
Sweet Potato Limited operates a large-scale commercial farm. It now plans to off- load some of its
shareholding to the public in order to raise funds to expand its operations.
Financial statements of Sweet Potato Limited are as follows:
Statement of Comprehensive Income for the year-ended 31st December, 2010
GHS
Turnover 245,800
Cost of sales 117,300
Gross profit 128,500
Selling, general & administrative expenses 87,140
Earnings before interest & tax 41,360
Interest 3,360
Profit before taxation 38,000
Taxation at 25% 9,500
Profit after tax 28,500

Income Surplus Account for the year ended 31st December 2010
GHS
Balance at 1/1/2010 95,940
Profit for the year 28,500
Dividends paid (12,400)
Balance at 31/12/2010 112,040
Statement of Financial Position as at 31st December, 2010
GHS GHS
Property, plant & equipment 197,500
Patents 16,400
Development expenditure 26,100
240,000
Current Assets
Inventories 43,400
Receivables 25,002
Bank and cash 11,888
80,290

Current Liabilities
Payables 30,800
Net Current assets 49,490
289,490
14% Medium-term loan (24,000)
Net assets 265,490

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 Financed By:
Stated capital 100,000
Capital surplus 53,450
Income surplus 112,040
265,490
Additional Information:

i. Stated Capital is made up as follows: GHS

Ordinary shares (issued @ GHS0.20 each) 80,000
22% Irredeemable Preference Shares 20,000
100,000
ii. A review of the development expenditure revealed that 60% of it is worthless.
iii. An independent valuer has placed values on some of the assets, detailed as follows:
GHS
Property, plant & equipment 222,000
Inventories 32,400
Receivables 20,000

iv. Profit forecasts for the next five years are as follows:
Profit before Tax Depreciation Charge
GHS GHS
2011 29,800 2,200
2012 32,000 2,450
2013 38,500 3,100
2014 39,600 4,050
2015 43,100 4,260
The estimated profit before tax figures are arrived at after charging the estimated depreciation.
v. Yam Limited is a competitor listed on the Ghana Stock Exchange and data extracted from its
recently published statements revealed the following:

Market capitalisation = GHS2,000,000

Number of ordinary shares = 800,000
Earnings per share = GHS0.20 (20 pesewas)
Dividend payout ratio = 80%
vi. The patents represent a license to produce an improved variety of potatoes and is expected to
generate a pre-tax profit of GHS20,000 per year for the next five years.
vii. The cost of capital of Sweet Potato Limited is 18%.

Required:

(a) Determine the value to be placed on each share of Sweet Potato Limited using the following
methods of valuation:
i. Net assets
ii. Prices-earnings ratio
iii. Dividend yield
iv. Discounted cash flow 12 marks
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The discount factors and annuity at 18% for the relevant years are as follows:
Year 1 2 3 4 5
Discount factor 0.847 0.718 0.609 0.516 0.437
Annuity 0.847 1.565 2.174 2.690 3.127

(b) Outline any three (3) reasons why the dividend yield of Yam Ltd should be adjusted before
it is used to value the shares of Sweet Potato Limited. (3 marks)
ICAG NOVEMBER 2011

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Question 2

Obuoba Ltd is a family controlled company that has grown over the years. The company is now
considering listing on the Stock Market. The MD believes that as the company has assets with a
book value of GHC46 million and shareholders fund GHC24 million, the company‟s value,
when listed should be at least GHC70 million . He proposes that 500,000 new shares should
be issued to the public to raise approximately GHC3.5 million for future expansion .
The company‟s financial performance for the last three years is summarized below:
Income statement for the years ended 31 December
2009 2010 2011
GHC‟000 GHC‟000 GHC‟000
Sales 40,000 45,000 52,000
Cost of goods sold 25,000 26,000 29,000
Gross Profit 15,000 19,000 23,000
Admin expenses 3,000 4,000 4,500
Selling and general expenses 1,600 2,600 4,500
Interest payable 1,400 1,400 2,000
Net Profit before tax 9,000 11,000 12,000
Current Taxation @ 20% 1,800 2 200 2,400
Net profit after tax 7,200 8,800 9,600

Statement of Financial Position as at 31 December

2009 2010 2011
GHC‟000 GHC‟000 GHC‟000
Non-current assets
Property, plant and equipment (Net):
Land and buildings 15,000 16,000 16,000
Plant 5,000 6,000 7,000
Investment (FVTPL) 2,000 2,000
Current Assets
Inventory 7,000 7,000 11,000
Trade Receivables 5,000 8,000 9,000
Cash 1,000 1,000 1000
--------- --------- ---------
33,000 40,000 46,000
Financed by
Stated Capital (Issued at GHC0.10 per share) 1,000 1,000 1,000
Retained earnings 18,000 19,000 23,000
Shareholders fund 19,000 20,000 24,000
Long term loans 7,000 7,000 11,000
Current liabilities
Trade payables 5,000 10,800 8,600
Taxation 2,000 2,200 2,400
- - - -
33,000 40,000 46,000
--------- --------- --------
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 Additional notes relating to the Income Statement for the year ended 31 December 2011 and the Statement
of Financial Position as at 31 December 2011 is as follows:
i. Obuoba‟s income statement includes GHC 8 million of revenue for credit sales made on a “sale or
return‟ basis”. At 31 December 2011, customers who had not paid for the goods, had the right to
return GHC 2·6 million of them. Obuoba applied a mark- up on cost of 30% on all these sales. In the
past, Obuoba‟s customers have sometimes returned goods under this type of agreement.
ii. The property, plant and equipment have not been depreciated for the year ended 31 December 2011.
Obuoba 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 2011 when the buildings had a
remaining life of 20 years. A qualified surveyor has valued the land and buildings at 31 December
2011 at GHS 18 million. Additional plant was installed in January 2011. Plant is depreciated at 20%
on the reducing balance basis.
iii. The investments at fair value through profit and loss [FVTPL] are held in a fund whose value changes
directly in proportion to a specified market index. At 1 January 2011 the relevant index was 150 and at
31 December 2011, it was 162.
iv. In late December 2011, the directors of Obuoba discovered a material fraud perpetrated by the
compa ny’s financial accountant that had been continuing for some time. Investigations reveal that
a total of GHC 2 million of the trade receivables as shown in the statement of financial position at
31 December 2011 had in fact been paid and the money had been stolen by the Financial
Accountant. An analysis revealed that GHC 1·5 million had been stolen in the year to 31st
December 2010 with the rest being stolen in the current year. Obuoba is not insured for this loss
and it cannot be recovered from the Financial Accountant.
v. During the year taxable temporary differences of GHC 500,000 arose. The applicable income tax
rate is 20%. This has not been included in the figures in the financial statements above.
vi. The long term loans consists of:
• 20% GHC 7 million debenture stocks issued on 1 January 2009 and redeemable at par on
31 December 2013; and
• 15% GHS 4 million loan notes issued on 1 January 2011 and redeemable on 31
December 2012 for GHC4,262,000 resulting in an effective interest rate of 18% per
annum. This Financial liability is to be measured at amortized cost.
vii. The only movements in the statement of changes in equity [retained earnings column] in 2011
were the reported draft profit and dividend payment.Obuoba‟s management has obtained some
financial information on a listed company in the same industry, which has the same number of
listed equity shares as Sankofa.
Dadeba
Market Capitalization 42 million
Number of shares 10 million
Earnings per share GHȻ0.60
Dividend pay-out ratio 60%

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Required
a) Assess the validity or otherwise of the Managing Director’s statement (5marks)
b) Advise the directors of Obuoba Ltd the values to be placed on an ordinary share using
the following methods
i. Price Earnings ratio
ii. Dividend yield
iii. Net Assets [fair values] (15 marks)
Note
The following assumptions and bases may be relevant:
i. The revised profit after tax for the current year may be a good representation of the
earnings of the entity.
ii. Additional information (i) – (iv) above would necessitate a revision of the 2011 Income
statement and statement of financial position profit. Dividend payment will however not be
affected
iii. Investing in unlisted securities is about 25% more risky than investing in listed securities.
ICAG, MAY 2012

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Question 3
Quality Handicraft Ltd [QHL] produces handicrafts for both local and foreign market. The company was
incorporated in the year 2008 and now employs about 150 craftsmen.
The shareholders of QHL mainly comprise the original founder and close family members who 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, Suama Handicraft Company [SHC]
which has similar business, though it also produces for the European market.
Summarized financial statistics for the two companies for the most recent financial year are as follows:

QHL SHC

Issued shares (million) 8 20

Net assets value [GHC ’million] 14.4 30
Earnings per share (pesewas) 35 28
Dividend per share (pesewas) 20 24
Debt: Equity ratio 1:7 1:6.5
Share price (as quoted on the stock - pesewas - 160
Expected rate of growth in earnings/dividends 5% 5.%

Additional Information:
i. The net assets of QHL stated above are the net book values of tangible non-current assets plus
working capital. However:
• A recent valuation of the buildings was GHC1,500,000 above book value
• An investment held which is designated as available for sale with a carrying value of
GHC1,000,000 is fair valued at GHC1,100,000
• Due to a dispute with one of their clients, an additional allowance for bad debts of
GHC750,000 could prudently be made.
• An item of plant with a carrying value of GHC800,000 is assessed to have value- in-use of
GHC760,000 and fair value less cost to sell of GHC780,000.
ii. Growth rate should be assumed to be constant per annum. QHL’s earnings growth rate estimate
was provided by the marketing manager, based on expected growth in sales adjusted by normal
profit margins. SHC’s growth rates are gleaned from press reports.
iii. The dividend yield of SHC approximates its cost of equity.

Required:
a) Compute a range of valuations for the business of QHL, using the information available and stating any
assumptions made. Use the following methods for the valuation (Net Assets, Price- earning method
and dividend growth methods) (9 marks)
b) Comment on the strengths and weaknesses of the methods used in (a) and their suitability for
valuing QHL (6 marks)
Note: The additional information (i) may affect the net asset value and the earnings per share
stated above. Ignore tax implications. (Total: 15 marks)
ICAG NOVEMBER 2010
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Question 4

Platinum Ltd intends to take over Bronze Ltd.

The following statements of Bronze Ltd for the year ended 31st December, 2009 are as follows:
BRONZE LTD
Income Statement for the year ended December 31st 2009
GHS
Profit before tax 450,000
Tax (125,000)
Profit after tax 325,000
Income Surplus Account for the year ended December 31st December 2009
Balance at beginning 250,000
Profit after tax 325,000
Dividend paid (180,000)
Balance at end 395,000
Statement of financial position as at 31st December, 2009
GHS
Non-Current Assets
Freehold land and building at cost 204,500
Plant and Machinery 156,700
Motor Vehicles (Net) 560,000
Patent 150,000
1,071,200
Current Assets
Inventories 500,000
Trade Receivable 680,000
Bank balance 120,000
1,300,000
Current Liabilities
Trade payable 240,000
Accrued expenses 180,000
420,000
Net Current Assets 880,000
Net Assets 1,951,200
Capital and Non-Current liabilities
Ordinary shares issued @ GHS1 per share 1,000,000
Income surplus 395,000
1,395,000
Non-current liabilities
25% Debenture stock 556,200
1,951,200

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 Additional information

i. Turnover, profits before tax and dividend of Broze Ltd over the past 5 years were as follows
Year Turnover Pre-tax Profit Dividend
GHS GHS GHS
2005 5,800,000 250,000 65,000
2006 6,900,000 320,000 80,000
2007 7,700,000 330,000 100,000
2008 8,500,000 410,000 120,900
2009 9,800,000 450,000 180,000
ii. The patent represents a license to produce and sell a special product. This product is expected to generate
a pre-tax profit of GHS12,000 per annum in perpetuity.
iii. The discounted present value of future cash payments in respect of the Debenture stock is GHS1,220,000.
iv. The discount rate of Bronze Ltd is 10% per annum.
v. Silver Ltd, major competitor of Bronze Ltd is listed on the Stock exchange and has a P/E ratio of 8 and
dividend yield of 10%.
vi. The under listed assets of Bronze Ltd have been revalued as indicated
GHS
Freehold land and building 610,000
Plant and machinery 288,000
Motor vehicle 340,000
vii. The estimated pre-tax profits of the company after taking into consideration depreciation over the next
five years are as follows:
Year Pre-tax Profit Depreciation
GHS GHS
2010 550,000 45,000
2011 650,000 55,000
2012 880,000 60,000
2013 1,200,000 85,000
2014 1,400,000 90,000

Required:

Estimate the value per share of Bronze ltd as at 31st December, 2009 using the following methods
a) Net Assets method
b) Discounted Cash flow method
c) Price earnings ratio method
d) Dividend valuation method 15 marks
Note
You may assume that it is about 20% more risky investing in unlisted entity than investing in listed entity.
Unless otherwise deemed inappropriate, the current year’s financial statements (appropriately adjusted) may
form the basis of the valuation.
ICAG MAY 2010

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Question 5

Bank Ltd is private family business engaged in the brewery and sale of local beer. The company decided to
raise capital at the stock exchange to expand its business and export the beer to other African countries. As
such, a valuation of the business has become necessary.

Financial statements of Banku ltd as at 30th September, 2009 are as follows:

Statement of financial position as at 30th September, 2009
GHS
Non-Current Assets
Property Plant and Equipment 126,700
Patent 25,000
151,700
Current Assets
Inventories 42500
Trade Receivable 27000
Bank balance 15,600
85,100
Current liabilities
Payables (22,800) 62,300
214,000
Non-current liabilities
15% Medium Term Loan (14,000)
Net Assets 200,000
Capital
Stated capital 120,000
Capital surplus 15,800
Income surplus 64,200
200,000

Income statement for the year ended 30th September 2009

GHS
Turnover 149,805
Cost of sales (74,500)
Gross Profit 75,305
Selling, General & Administrative expenses (38,600)
Profit before interest and tax 36,705
Interest expense (2,100)
Profit before interest tax 34,605
Taxation (8,651)
Profit after tax 25,954
Cumulative preference dividend (1,600)
24,354
Ordinary dividend (12,000)
Retained Profit 12,354
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 Additional information

i. The stated capital of Banku Ltd is made up as follows:

GHS
ordinary shares issued at GHS0.50 100,000
8% cumulative Preference shares 20,000
ii. The patent represents a license to brew special high grade beer which is expected to generate a pre-tax
profit of GHS30,000 per year over the next five years.
iii. An independent value has placed a value of GHS150,000 on the property, plant and equipment and
GHS35,000 on inventory but 20% of trade receivable will not be realized.
iv. The discounted present value of future cash payments in respect of the medium term loan is 18,100
v. Profit before tax of Banku Ltd over the past four years is as follows:
Year ended 30th September GHS
2008 32,500
2007 26,050
2006 12,400
2005 21,000
vi. Okro Ltd is a major competitor of Banku Ltd and is listed on the Ghana stock exchange. Data extracted
from the most recent published financial statements of okro include the following:
Price per share 5.40
Earnings per share 0.90
Dividend pay-out ratio 60%
vii. The discount rate of Banku Ltd is 12% annum while the income tax rate for companies is 25%.
Year 1 Year 2 Year 3 Year 4 Year 5
Discount factor at 12% 0.893 0.797 0.712 0.636 0.567
Annuity factor at 12% 0.893 1.690 2.402 3.038 3.605

Required:

a) Compute and discuss the values to be placed on the ordinary shares of Banku Ltd using the next asset
base, dividend yield and earnings yield methods. (12 marks)
b) Outline any five (5) factors that influence the estimations of future profits of a company.
(5 marks)
ICAG NOVEMBER 2009

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Question 6

The owners of Kose Limited and Gari Limited are currently in discussion over the sale of Kose Limited to
Gari Limited. Both companies have been in operation since 1985 and are not listed on the stock exchange.
The most recent statement of financial position and the Income statements of the two companies are given
below:

Statement of financial Position as at 31st December, 2008

Kose Limited Gari Limited
GHS000 GHS000
Non-current Assets
Goodwill 1,080 -
Fixture and fittings 2,655 2,721
Land and Building 3,690 3,782
Motor vehicles 3,420 4,104
Equipment 990 1,015
11,835 11,622
Net current Assets
Inventory 8,500 13,500
Debtors 14,085 12,500
Bank and cash 3,500 9,250
Creditors (5,250) (2,650)
Taxation (1,125) (1,850)
Accrued (5,085) (125)
14,625 30,625
Non-current Liabilities
22% Debentures (2,500) -
Total Net Assets 23,960 42,247
Owners' Equity
Stated Capital 12,500 27,000
Capital Surplus 8,442 8,653
Income Surplus 2,937 6,594
Share Deals 81 -
23,960 42,247

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 The income statements of Kose Limited and Gari Limited prepared for the year ended December 31, 2008 are
as follows:
Kose Limited Gari Limited
GH¢’000 GH¢’000
Turnover 29,260 36,575
Cost of sales (8,932) (11,165)
Depreciation (2,448) (3,060)
Operating expenses (9,080) (11,350)
Profit before tax 8,800 11,000
Tax (2,200) (2,750)
Profit after tax 6,600 8,250
Dividend (2,100) (2,063)
Retained profit 4,500 6,187
Income surplus – Jan 1, 2008 (1,563) 407
Income surplus – Dec 31, 2008 2,937 6,594

Additional information

i. Araba Limited, which operates in the same industry as Kose Limited and Gari Limited is listed on the
Ghana Stock Exchange. Information obtained from the Stock Exchange on Araba Limited include the
following:
Market capitalization GH¢24,990,000
Earnings per share GH¢0.30
Number of ordinary shares issued 8,500,000
Dividend payout ratio 80%
ii. A valuer engaged jointly by shareholders of Kose Limited and Gari Limited put the fair values of tangible
assets as follows:
Kose Limited Gari Limited
GH¢’000 GH¢’000
Fixtures & fittings 3,585 3,650
Land & buildings 4,650 4,750
Motor vehicles 3,000 3,450
Equipment 1,200 1,150
Stocks 9,500 12,850

These have not been incorporated in the financial statements of either company.

iii. Kose Limited estimates that 90% of debtors are collectable. No provision has been made for this in the
accounts prepared for 2008.
iv. On 1st February 2008, the directors of Kose Limited promised its employees a bonus payment of
GH¢850,000 if pre-tax profit for 2008 exceeded GH¢4,500,000. The payment of the bonus has been
suspended by the directors in view of the impending sale of the company and has not been included in the
financial statements for 2008. The corporate tax rate is 25%.

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 v. A business plan prepared for Kose Limited in June 2008 contained the following:

Year ended Net Profit Net Profit Interest

31/12 before tax Tax after tax Depreciation Charge
GHS000 GHS000 GHS000 GHS000 GHS000
2009 7920 1980 5940 2800 1250
2010 9108 2277 6831 2940 1550
2011 10018 2504 7514 3250 2200
2012 11120 2780 8340 3300 2200
2013 12232 3058 9170 3350 2250

vi. The cost of capital of Kose Limited is estimated at 30% and all cash flows are assumed to accrue at the
end of each year. The present value of GH¢1 at a discount rate of 30% per annum are as follows:

Year 0 1 2 3 4 5
Discount factor 1.0000 0.7692 0.5917 0.4551 0.3501 0.2693

vii. Goodwill of Kose Limited is estimated to be GH¢3,500,000.

viii. The stated capital of Kose Limited is made up of the following:
12,000,000 ordinary shares of no par value GH¢8,000,000
4,000,000 10% preference shares of no par value GH¢4,500,000

Required:
a) Advise the shareholders of Kose Limited on the range of values to be placed on its shares using net assets,
earnings, dividend yield and the discounted cash flow methods of valuation. (16 marks)

b) Comment on the various valuations arrived at. (4 marks)

Note: Please make any appropriate assumption(s) Total: 20 marks

ICAG MAY 2009 (Adapted)

20
Question 7

Fruits Ltd, a trading concern, has been in business for the past 15 years. The company plans to raise
GH¢100,000 to finance a major new investment opportunity. The board is now considering a share flotation
on the Ghana Stock Exchange to raise the said amount. The company plans to sell 25% of the existing shares
and issue new shares to raise the GH¢100,000 required.
The following is the summarized financial data of Fruits Ltd.
Profit and loss accounts for the year ended 31st March
2008 2007
GH¢ GH¢
Turnover 89,000 55,000
Cost of sales (44,500) (35,000)
Gross profit 44,500 20,000
General & Administrative Expenses (31,500) (12,500)
Interest payable (1,950 (2,100)
11,050 5,400
Investment income 4,500 4,500
Taxation (6,300) (1,750)
Profit after tax 9,250 8,150

Income surplus account for the year ended 31st March

2008 2007
GH¢ GH¢
Balance b/f 13,545 11,395
Add profit for year 9,250 8,150
22,795 19,545
Proposed dividend 9,452 (6,000)
Balance b/f 13,343 13,545

Statement of financial position as at 31 March

2008 2007
GH¢ GH¢
Non-current Assets
Patent 3,500 3,500
Land & Building 8,050 8,050
Motor Vehicle 22,500 20,500
Plant & Equipment 13,500 14,500
47,550 46,550
Curre nt Assets
Stock 10,400 10,025
Debtors 10,903 10,425
Cash 3,070 2,050
24,373 22,500

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 Curre nt Liability
Trade Creditors
Overdraft 10,705 8,050
Taxation 5,800 6,205
2,075 1,250
Net Assets 18,580 15,505
53,343 53,545
Stated Capital (50,000 Ordinary Shares)
Income surplus Accounts 40,000 40,000
13,343 13,545
53,343 53,545
Additional information:

i) Profit before tax is expected to grow at approximately 12% per year.

ii) The existing directors who own 95% of the shares declared dividend of GH¢9,452 and GH¢6,000 in
2008 and 2007 financial year respectively.
iii) The average earnings yield of listed companies in the same industry as Fruits Ltd is 22% per annum.
iv) The value of freehold land and buildings has risen by 10% as at 31st March, 2008.
v) The cost of capital of Fruits Ltd is estimated at 28%.
vi) The replacement cost of plant and equipment is GH¢15,000 but its current realizable value is
GH¢11,000
vii) An amount of GH¢1,200 of stock is obsolete and could only be sold for GH¢300 as scrap.
viii) Profit is expected to grow at approximately 12% per annum from 1st April, 2009 to 31st March, 2013.
Working capital is expected to remain constant throughout the five year period. Depreciation charge
for the year ended 31st March, 2008 amounted to Gh¢4,400 and it is expected to increase by 5% per
annum from 1st April, 2009 to 31st March, 2013. It is assumed that all cash flows will accrue at the
end of the year.

Required:

a) Estimate the value per share of Fruits Ltd using any four (4) valuation methods as far as the
information provided permits. (12 marks)

b) State four (4) challenges associated with a private company going to the stock exchange to raise
capital through floatation. (4 marks)

c) State factors you would wish to consider in carrying out a review of profit forecast.
(4 marks)
Total: 20 marks

ICAG NOVEMBER 2008 (Adapted)

22
 Question 8
The financial statements of Sombo Limited for the year ended 31st December, 2007 are summarized as
follows:
Balance Sheet as at 31st December, 2007
GH¢ GH¢
Property, plant & equipment 180,000
Copyright 18,000
198,000
Curre nt Assets
Stock 14,500
Debtors 22,000
Bank & Cash 16,000
Current Liabilities 52,500
Creditors (12,500) 40,000
238,000
Financed By:
Stated capital 100,000
Income surplus 88,000
Debentures 50,000
238,000
Additional information
i. The stated capital of Sombo Limited is made up of 25 million ordinary shares of no par value. The
company is unquoted
ii. Profit after tax for Sombo Limited over the last four years were as follows:
GH¢
2006 26,000
2005 32,000
2004 18,000
2003 38,000
And profit after tax for the year ended 2007 transferred to income surplus was GH¢58,500.
iii. The copy rights represent a license to produce and sell a book on HIV Aids which is in very high demand.
Over the next five years, sale of this book is expected to yield total net cash inflow of Gh¢3,500
iv. The fair value of the property, plant & equipment is GH¢240,000. Debtors amounting to GH¢8,500 is
considered irrecoverable.
v. The discounted present value of future cash payments in respect of the Debentures is GH¢72,000
vi. The discount rate of Sombo Ltd is 12% per annum.
vii. Banku Ltd is a competitor of Sombo Ltd and is quoted on the Ghana Stock Exchange with a price-earning
ratio of 8 and a dividend yield of 4.2%.
viii. The shareholders of Sombo Ltd have decided to dispose of 40% of their shares in the company.
Required:
a) Advise the directors of Sombo Ltd on the values to be placed on the shares using the following methods:
i. assets basis
ii. earnings yield basis
iii. dividend yield basis. (12 marks)
b) State any three (3) reasons why an unlisted company may wish to place a value on its shares. (3 marks)
c) Briefly explain why in business valuation of unquoted companies, earnings yield is marked up while
dividend is marked down. (5 marks)
ICAG MAY 20
23
Question 9
CH Bank Ltd and RT Bank Ltd were licensed as Merchant Banks and have been in existence since 1968. The
shareholders of RT Bank are in discussion with CH Bank, the first to be listed on the Ghana Stock Exchange,
for a possible merger following the inability of RT to raise its stated capital to the minimum prescribed by the
Bank of Ghana.
The Balance Sheets of the Banks as at 31st December, 2006 are presented below:
CH BANK LTD RT BANK LTD
GH¢’m GH¢’m
ASSETS
Cash and Balances with Bank of Ghana 150,148 120,238
Government Securities 291,847 176,222
Due from other Banks and Financial Institutions 116,000 124,980
Loans and Advances to Customers 524,612 348,700
Other Assets 115,794 89,590
Property, Plant and Equipment 28,500 15,600
TOTAL ASSETS 1,226,901 875,330

LIABILITIES
Customer Deposits 932,786 717,279
Due to Banks and other Financial Institutions 49,400 32,440
Borrowings 76,206 38,423
Other Liabilities 61,309 41,438
TOTAL LIABILITIES 1,119,701 829,580

SHAREHOLDERS’ FUNDS
Stated Capital 86,200 30,000
Income Surplus 8,500 6,350
Capital surplus - 2,500
Statutory Reserve Fund 12,500 6,900
TOTAL SHAREHO LDERS’ FUND 107,200 45,750
TOTAL LIABILITIES AND SHAREHOLDERS’ FUND 1,226,901 875,330

The Profit and Loss Account of RT Ltd for the year ended 31st December, 2006 is shown below:
¢’m
Total Income 32,400
Operating Expenses (16,144)
Charge for bad & doubtful debts (4,500)
Profit before tax 11756
Taxation (2,351)
Profit after tax 9,405
Transfer to Statutory Reserve (4,703)
4,702

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 The Directors of the two Banks after several discussions agreed on goodwill of ¢6,000 million for RT Bank
Ltd and have commissioned Brains Consult to carry out an independent valuation of the shares of RT Bank. A
review of the books and records of RT Bank revealed the following:

i. In September 2006, an on-site examination conducted by Bank of Ghana revealed that RT had
underprovided for bad and doubtful debts to the tune of ¢5,600 million. In line with the banking Act 2004,
(Act 673), Bank of Ghana imposed a penalty of ¢1,200 million on RT Bank. These have not been
provided for in the accounts of RT Bank Ltd.
ii. Other assets of RT Bank Ltd include investment of ¢2,300 million in SAM Limited, a wholly owned
subsidiary of RT Bank Ltd. This investment is now considered worthless.
iii. An amount of ¢1,400 million representing cheques sent to Palam Rural Bank Ltd. for collection in 2004 is
included in balances due from other Banks. Recent correspondence from Palam Rural Bank Ltd indicates
that those cheques were never received.
iv. The Bank of Ghana debited the clearing account of RT Bank Ltd with a cheque amounting to ¢1,800
million drawn in favour of RT Bank Ltd in 2003. This amount was written off to Profit and Loss Account
in 2004 by RT Bank Ltd. The Bank of Ghana subsequently corrected the error in June 2006 but is not
reflected in the books of RT Bank Ltd.
v. The investment in government securities was understated by ¢853 million resulting from discount earned
on the bills for 2006.
vi. Property, plant and equipment of RT Ltd were revalued in 2005 by an independent valuer. The assets are
depreciated at 15% per annum. The directors of both Banks estimate that the market price of the fixed
assets has increased by approximately 10% of their current carrying value and that the net realizable value
of the assets is ¢19,000 million.
vii. Information obtained from the Ghana Stock Exchange bulletin indicates that market price per share of CH
Bank Ltd is ¢1,500 with earnings per share of ¢100. CH Bank Ltd is registered with 150,000,000 ordinary
shares of no par value out of which 90,000,000 have been issued and fully paid for.
viii. The stated capital of RT Bank Ltd is made up of 50,000,000 ordinary shares of no par value.
ix. The corporate tax rate of RT Bank Ltd for 2006 was 20%.

Required:
a) Determine the price per share of RT Bank Ltd using
i. Net assets basis (going concern) (7 marks)
ii. Earnings yield basis (7 marks)
b) Prepare the Balance Sheet of CH Ltd assuming net assets basis of valuation was adopted and the purchase
consideration was fully settled by issuing ordinary shares to owners of RT Bank Ltd. (6 marks)
(Total: 20 marks)
ICAG MAY 2007

25
Question 10

The shareholders of Atea Ltd., a successful family business, are planning to offer 2,000,000 of their shares
for sale to the public.
The summarized balance sheet of Atea Ltd. as at 31st December, 2005 is as follows:
¢’million
Long term assets 19,000
Net current assets 9,500
28,500
Stated Capital
5,000,000 ordinary shares of no par value 9,500
Income Surplus 11,000
18% Debenture Stock 8,000
28,500

Extracts of income surplus accounts from 2001 to 2005 are:

Year Net Profit Dividend Retained
After tax profit
¢’million ¢’million ¢’million
2001 2,850 950 1,900
2002 3,325 950 2,375
2003 3,800 950 2,850
2004 3,800 1,900 1,900
2005 4,275 1,900 2,375

The following information is relevant:

i. The shares were issued several years ago.

ii. Included in long term assets is a piece of land which cost ¢950 million. It has recently been valued
professionally at ¢2,950 million in its current use and at ¢3,750 million as residential land. The
valuation has not been incorporated in the accounts.

iii. The directors have applied to the Metropolitan Assembly for a permit for a change of use of the land.
In addition they are arranging alternative premises at a rental of ¢285 million per year.

iv. ¢100 million of trade debtors is considered irrecoverable.

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 v. The directors have decided that Abeh Ltd, a quoted company which manufactures similar products
as those of Atea Ltd, provides a relevant comparison to Atea Ltd.
The following information relate to Abeh Ltd.
2005 Average
2001 to 2005
¢ ¢
Dividend per share 285 228
Price per share 4,560 4,750
Earnings per share 570 380
Book value of net assets per share 3,800 -

Required:

a) Suggest a price range for the sale of 2,000,000 of the shares of Atea Ltd to the public using each of the
following methods:
i. Earnings
ii. Dividend
iii. Net assets (14 Marks)

b) In any takeover bid, both buyers and sellers have a price that they realistically hope to achieve. Outline
any four factors that shareholders of Atea Limited may consider in fixing the final price.
(6Marks)
(Total 20 Marks)
ICAG NOVEMBER 2006

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Question 11
a) When acquiring an unquoted company in a takeover bid, the final offer 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:
Outline any five(5) factors that are likely to influence the value of the price earnings ratio.
b) The summarized financials of Kofi Ltd and Yaa Ltd are presented below:
Profit and Loss Account for the year ended 31st December, 2004
Kofi Ltd Yaa Ltd
GHS 'm GHS' m
Sales 45,000 38,000
Cost of sales (17,100) (13,680)
Gross profit 27,900 24,320
Selling, General & Admin. Expenses (8,900) (7,600)
Net Operation Profit 19,000 16,720
Other Incomes - 6,200
Profit before tax 19,000 22,920
Taxation (4,940) (5,959)
Profit after tax 14,060 16,961
Dividend (8,000) (9,000)
Retained Profit for the Year 6,060 7,961
Income Surplus - January 1st 4,500 5,300
Income Surplus - December 31st 10,560 13,261
Statement of Financial Position as at December 31, 2004
Kofi Ltd Yaa Ltd
GHS'm GHS' m
Tangible non-current assets 53,400 43,500
Parents 9,800 -
Goodwill 3,000 4,800
Development expenditure 3,480 -
Current Assets 10,200 25,900
Current Liabilities (10,800) (5,600)
69,080 68,600
Stated Capital 23,000 30,000
Income Surplus 10,560 13,261
Capital Surplus 15,520 13,339
20% Debenture 20,000 12,000
69,080 68,600

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A small family which holds the shares of Kofi Ltd decided to sell all the shares to Yaa Ltd. Yaa Ltd, a listed
company operating in a small industry has dividend yield and price/earnings ratios of 10% and 12.5%
respectively.

Valuation experts engaged to revaluate the assets place the following values on the assets of Kofi Limited.
GHS’m
Tangible assets 95,000
Patents 5,000
Current Assets 8,000

Goodwill and 80% of the development expenditure were considered worthless. The stated capitals of Kofi
Limited and Yaa Limited are made up of ordinary shares issued at GHS4600 and GHS5000 each
respectively.

A strategy document prepared by Kofi limited in 2005 contained the following:

Profit before tax Depreciation
GHS’m GHS’m
2006 10,200 1,500
2007 16,000 3,200
2008 22,000 5,000
2009 40,000 6,200
2010 42,000 8,000

The cost of capital of Kofi Limited and Yaa are 20% respectively.

Required:

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

i. Net Assets
ii. Price/Earnings ratio
iii. Discounted Cash flow (Total: 20 marks)
ICAG NOVEMBER 2005 (Adapted)

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Question 12

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

GHS
Profit before tax 24,800,000
Taxation (8,000,000)
Profit after tax 16,800,000
Dividends (3200,000)
Retained Earnings 13,600,000

Statement of Financial Position as at 30th June, 2015

GHS
Non-Current Assets 62,400,000
Current Assets 21,400,000
83,800,000

Current liabilities 12,800,000

Long Term Liabilities 35,000,000
47,800,000

Net Assets 36,000,000

Stated Capital 20,000,000

Retained Earnings 16,000,000
36,000,000

The following additional information is provided:

1. The discounted present value of future cash payments in respect of the long term loan is GHS48,800,000
2. The stated capital of Depot Ltd is made up of 25,000,000 ordinary shares of no par value.
3. Current Assets include inventory of GHS6,600,000 representing goods received from a major supplier
on “not for sale but display only” basis.
4. The fair value of the tangible non-current assets was GHS116,000,000
5. The profit for the current year includes VAT of 17.5% on turnover of GHS8,500,000 being invoice
amount sold to a customer.
6. The discount rate of Depot Ltd is 10% per annum.
7. Warehouse Ltd, major competitor of Depot Ltd is listed with P/E ratio of 9 and dividend yield of 5.2

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8. Profit after tax over the 4 years were as follows
GHS
th
30 June, 2014 12,000,000
30th June, 2013 14,400,000
30th June, 2012 6,400,000
30th June, 2011 11,200,000

Required:

Compute the value to be placed on the ordinary shares using three methods of valuation and advise the
directors accordingly. 15 marks

ICAG MAY 2016

Question 13

Dagadu Ltd is an unlisted private company, which deals in computer and other ICT equipment. On 1st
March, 2012, a shareholder-director, Mr Kusi, informed you that he was contemplating disposing of his
shares. The regulations of the company require him to offer his shares first to his fellow shareholders. If
none offers a reasonable price, he may seek an outside purchaser.
You have been given the financial statements of the company as follows:
Dagadu Ltd
Income Statements for year to 31st December
2010 2011 Projected
2012
GHC000 GHC000 GHC000
Sales 10,800 12,000 13,200
Cost of sales (8,820) (9,900) (10,683)
Gross profit 1,980 2,100 2,517
Other trading costs (750) (900) (990)
Net trading costs 1,230 1,200 1,527
Interest payables:
15% Debentures - 144 144
Bank overdraft 75 0 0
Net profit before tax 1,155 1,056 1,383
Taxation (600) 540 720
Net profit for the year 555 516 663
Dividends:
10% Cumulative Preference shares (60) (60) (60)
Ordinary shares (240) (300) (300)
Retained earnings for the year 255 156 303

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The statements of financial position as at the end of corresponding years and projected statement for
2012 are as follows:
2010 2011 Projected 2012
GHC000 GHC000 GHC000
Non-current assets 2,115 2,220 3,135
Current assets 2,982 3,609 4,206
Current liabilities (1,344) (840) (1,365)
Net current assets 1,638 2,769 2,481
Net assets 3,753 4,989 5,976
Financed by:
10% Cumulative Preference shares issued @ GHC3 600 600 600
Ordinary shares 1,200 1,500 1,500
Capital surplus 900 600 600
Income surplus 1,032 1,248 2,226
3,732 3,948 4,926
15% Debenture (redeemable 2016) - 750 750
Deferred taxation 21 291 300
3,753 4,989 5,976

Additional information:
1) Changes in the stated capital over the last three years are as follows:
i. Issued for cash at 1/1/2009:
200,000 10% Cumulative Preference Shares issued at GHC3 fully paid and 250,000 ordinary
shares issued at GHC3 fully paid.
ii. Issued for cash at 1/1/2010:
150,000 ordinary shares issued at GHC3 fully paid.
iii. Bonus issue at 1/1/2011:
100,000 ordinary shares issued at GHC3 per share, fully paid by capitalising from Capital
Surplus Account and ranking for dividend in 2011 and thereafter.
2) The ordinary shares carry one vote each at general meetings. The preference shares do not carry votes
unless their dividends are in arrears when each share carries one vote.
Statistics selected from similar listed company include the following:
Earning per share GHC0.60
Market capitalization GHC2,700,000
No. of shares 450,000
Dividend payout ratio 80%
Assume that investment in unlisted entity is 20% more risky than investment in quoted securities.

Required:
Estimate the range of prices per share that Mr Kusi can reasonably expect to realise from the sale of his
50,000 ordinary shares to his fellow shareholders using the following methods:
a) Dividend Yield
b) Earnings Yield
c) Net Assets (12 marks)
d) Estimate the highest price per share that he can reasonably obtain from an outside purchaser.
(2 marks)
ICAG NOVEMBER 2012

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