Book value – NBC Institute

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

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

Question

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

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

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

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

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

Required:

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

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

Answer

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

Topic: Cost of capital

AFM – May 2019 – L3 – Q3a – Valuation of acquisitions and mergers

Use comparative analysis to value Alpha Ltd based on data from Beta Ltd and Gamma Ltd, and discuss factors for private company valuation.

Question

At a meeting of the Directors of the Alpha Company Limited – a privately owned company – in May 1975, the recurrent question is raised as to how the company is going to finance its future growth and at the same time enable the founders of the company to withdraw a substantial part of their investment. A public quotation was discussed in 1974 but because of the depressed nature of the stock market at that time, consideration was deferred. Although the matter is not of immediate urgency, the Chairman of the company – one of the founders – produces the following information which he has recently obtained from a firm of financial analysts in respect of two publicly quoted companies, Beta Limited and Gamma Limited, which are similar to Alpha Limited in respect to size, asset composition, financial structure, and product mix.

The only information you have available at the meeting in respect of Alpha Limited is the final accounts for 1974, which disclose the following:
Alpha Limited
Share Capital (no variation for 8 years) 100,000 Ordinary GH¢1 Share
Post-Tax Earnings GH¢400,000
Gross Dividends GH¢100,000
Book Value GH¢3,500,000

From memory, you are of the view that the post-tax earnings and gross dividends for 1974 were at least one-third higher than the average of the previous five years.

Required:

i) Use the information provided to answer the Chairman’s question on what Alpha Ltd was worth in 1974.
ii) Discuss FOUR (4) factors to be taken into account in trying to assess the potential market value of shares in a private company when they are first offered for public subscription.

Answer

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Tags: Book value, Earnings Per Share, Market Price, Mergers and Acquisitions, Private Company Valuation, Valuation
Level: Level 3

Topic: Valuation of acquisitions and mergers
Series: MAY 2019

FM – Nov 2020 – L2 – Q2 – Business valuations

Estimate the value of equity capital using different valuation methods: Book value, Replacement cost, Realizable value, Gordon growth model, and P/E ratio model.

Question

The directors of Carmen Ltd, a large conglomerate, are considering the acquisition of the entire share capital of Manon Ltd, a private limited company that manufactures a range of engineering machinery. Neither company has any long-term debt capital. The directors of Carmen Ltd believe that if Manon Ltd is taken over, the business risk of Carmen Ltd will not be affected.

The accounting year of Manon Ltd ends on 31 December. Its Statement of Financial Position as at 31 December 2018 is expected to be as follows:

Manon Ltd’s summarized statement of profit or loss extract for the five years to 31 December 2018 is as follows:

The following additional information is available:

i) There have been no changes in the issued share capital of Manon Ltd during the past five years.
ii) The estimated values of Manon Ltd’s PPE and inventory and work-in-progress as at 31 December 2018 are:

	Replacement cost (GH¢)	Realizable value (GH¢)
PPE	725,000	450,000
Inventory and work-in-progress	550,000	570,000

iii) It is expected that 2% of Manon’s debtors at 31 December 2018 will be uncollectible.
iv) The cost of capital of Carmen Ltd is 9%. The directors of Manon Ltd estimate that the shareholders of Manon Ltd require a minimum return of 12% per annum from their investment in the company.
v) The current P/E ratio of Carmen Ltd is 12. Quoted companies with business activities and profitability similar to those of Manon Ltd have P/E ratios of approximately 10, although these companies tend to be much larger than that of Manon Ltd.

Required:

Estimate the value of the total equity capital of Manon Ltd as at 31 December 2018 using each of the following bases:

a) Book value (2 marks)
b) Replacement cost (4 marks)
c) Realizable value (4 marks)
d) The Gordon dividend growth model (5 marks)
e) The P/E ratio model (5 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Book value, Business Valuation, Gordon growth model, P/E Ratio, Realizable value, Replacement cost
Level: Level 2

Topic: Business valuations
Series: NOV 2020

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

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

Question

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

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

Required:

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

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

Answer

Find Related Questions by Tags, levels, etc.

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

Topic: Cost of capital

AFM – May 2019 – L3 – Q3a – Valuation of acquisitions and mergers

Use comparative analysis to value Alpha Ltd based on data from Beta Ltd and Gamma Ltd, and discuss factors for private company valuation.

Question

From memory, you are of the view that the post-tax earnings and gross dividends for 1974 were at least one-third higher than the average of the previous five years.

Required:

Answer

Find Related Questions by Tags, levels, etc.

Tags: Book value, Earnings Per Share, Market Price, Mergers and Acquisitions, Private Company Valuation, Valuation
Level: Level 3

Topic: Valuation of acquisitions and mergers
Series: MAY 2019

FM – Nov 2020 – L2 – Q2 – Business valuations

Estimate the value of equity capital using different valuation methods: Book value, Replacement cost, Realizable value, Gordon growth model, and P/E ratio model.

Question

The following additional information is available:

	Replacement cost (GH¢)	Realizable value (GH¢)
PPE	725,000	450,000
Inventory and work-in-progress	550,000	570,000

Required:

Estimate the value of the total equity capital of Manon Ltd as at 31 December 2018 using each of the following bases:

a) Book value (2 marks)
b) Replacement cost (4 marks)
c) Realizable value (4 marks)
d) The Gordon dividend growth model (5 marks)
e) The P/E ratio model (5 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Book value, Business Valuation, Gordon growth model, P/E Ratio, Realizable value, Replacement cost
Level: Level 2

Topic: Business valuations
Series: NOV 2020

Question Tag: Book value

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

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

AFM – May 2019 – L3 – Q3a – Valuation of acquisitions and mergers

Use comparative analysis to value Alpha Ltd based on data from Beta Ltd and Gamma Ltd, and discuss factors for private company valuation.

FM – Nov 2020 – L2 – Q2 – Business valuations

Estimate the value of equity capital using different valuation methods: Book value, Replacement cost, Realizable value, Gordon growth model, and P/E ratio model.

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

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

AFM – May 2019 – L3 – Q3a – Valuation of acquisitions and mergers

Use comparative analysis to value Alpha Ltd based on data from Beta Ltd and Gamma Ltd, and discuss factors for private company valuation.

FM – Nov 2020 – L2 – Q2 – Business valuations

Estimate the value of equity capital using different valuation methods: Book value, Replacement cost, Realizable value, Gordon growth model, and P/E ratio model.

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

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

You're reporting an error for "FM – May 2022 – L3 – Q5 – Cost of Capital"

AFM – May 2019 – L3 – Q3a – Valuation of acquisitions and mergers

Use comparative analysis to value Alpha Ltd based on data from Beta Ltd and Gamma Ltd, and discuss factors for private company valuation.

You're reporting an error for "AFM – May 2019 – L3 – Q3a – Valuation of acquisitions and mergers"

FM – Nov 2020 – L2 – Q2 – Business valuations

Estimate the value of equity capital using different valuation methods: Book value, Replacement cost, Realizable value, Gordon growth model, and P/E ratio model.

You're reporting an error for "FM – Nov 2020 – L2 – Q2 – Business valuations"

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

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

You're reporting an error for "FM – May 2022 – L3 – Q5 – Cost of Capital"

AFM – May 2019 – L3 – Q3a – Valuation of acquisitions and mergers

Use comparative analysis to value Alpha Ltd based on data from Beta Ltd and Gamma Ltd, and discuss factors for private company valuation.

You're reporting an error for "AFM – May 2019 – L3 – Q3a – Valuation of acquisitions and mergers"

FM – Nov 2020 – L2 – Q2 – Business valuations

Estimate the value of equity capital using different valuation methods: Book value, Replacement cost, Realizable value, Gordon growth model, and P/E ratio model.

You're reporting an error for "FM – Nov 2020 – L2 – Q2 – Business valuations"

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