Question Tag: Discounted Cash Flow

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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

FM – Nov 2024 – L2 – Q2 – Investment Appraisal

Calculate the NPV of launching two new products, Agbui and Loloi, and advise on the investment decision.

Question

Santrofi PLC is a publisher that wants to expand its market share in magazine publications. The company plans to launch two new products, Agbui and Loloi, at the start of January 2025, which it believes will each have a 4-year life span. The sales mix is assumed to be fixed. The information below is relevant:

Expected sales volumes (units) for Agbui:

Year	1	2	3	4
Volume	30,000	55,000	50,000	15,000

The first year’s selling price and direct material costs for each Agbui unit will be GH¢31 and GH¢12, respectively. On the other hand, the company expects to sell 25% more Loloi units than Agbui. Both selling price and direct material cost of Loloi are expected to be 25% less than Agbui’s.
Incremental fixed production costs are expected to be GH¢500,000 in the first year of operation, apportioned based on revenue. Advertising costs will be GH¢250,000 in the first year of operation and then GH¢125,000 per year for the following two years.
To produce the two products, an investment of GH¢1 million in machinery and GH¢500,000 in working capital will be needed, payable at the start of the period. Santrofi PLC expects to recover GH¢600,000 from the sale of machinery at the end of the project life. Investment in machinery attracts a 100% first-year tax-allowable depreciation. The company has sufficient profit to take full advantage of the allowance in Year 1. For the purpose of reporting accounting profit, the company depreciates machinery on a four-year straight-line basis.
Revenue and costs are expected to be affected by inflation after the first year as follows:
- Selling price: 3% a year
- Direct material cost: 3% a year
- Fixed production cost: 5% a year
The company’s real discount rate is 10% for investment appraisal. Average inflation is deemed to be 3%. The applicable corporate tax rate is 25%.

Required:
Calculate the Net Present Value (NPV) of the proposed investment in the two products and advise the company on its investment appraisal.

Answer

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Tags: Corporate Tax, Discounted Cash Flow, Inflation, Investment Appraisal, Machinery Investment, Net Present Value
Level: Level 2

Topic: Introduction to Investment Appraisal
Series: Nov 2024

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

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

Question

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

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

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

Forecast Profits

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

The following information is relevant:

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

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

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

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

Answer

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Tags: Acquisition Appraisal, Discounted Cash Flow, Investment Analysis, Profit Forecast, Valuation
Level: Level 3

Topic: Mergers and acquisitions
Series: NOV 2014

FM – May 2021 – L3 – Q1 – Business Valuation Techniques

Evaluate the value of Zinco Limited using various valuation techniques and estimate the coupon rate for bond financing.

Question

Palemo Temidayo (PT) is a large engineering company listed on the stock market. The company is considering the purchase of Zinco, an unlisted company that produces a number of engineering components.
The board of directors is concerned about the appropriate price to pay for Zinco. As a starting point, it has been decided to provide a range of valuations based on different industry-recognized techniques.

Summarized financial statements of Zinco Limited for the last two years are shown below:

Statements of Profit or Loss for the years ended 30 June

	2020 (N’000)	2019 (N’000)
Sales Revenue	112,400	101,090
Opening Profit before exceptional items	6,510	4,100
Exceptional Items	(10,025)	–
Interest Paid (Net)	(1,400)	(890)
Profit/(Loss) before Tax	(4,915)	3,210
Taxation	(1,050)	(890)
Profit/(Loss) after Tax	(5,965)	2,320
Note: Dividend	1,000	500

Statement of Financial Position as at 31 March (N’000)

Additional Information Relating to Zinco:

If the acquisition succeeds, there will be revenue synergy leading to an increase in annual sales revenue of Zinco of 25% for three years, and 10% per year thereafter.
Non-cash expenses, including depreciation, were N4,100,000 in 2020.
Income tax rate is 30% p.a.
Capital expenditure was N5 million in 2020 and is expected to grow at approximately the same rate as revenue.
Working capital, interest payments, and non-cash expenses are expected to increase at the same rate as revenue.
Zinco has a patent with a current market value of N50 million. This has not been included in the non-current assets.
Operating profit is expected to be approximately 8% of revenue in 2021 and to remain at the same percentage in future years.
Dividends are expected to grow at the same rate as revenue.
The realizable value of inventory is expected to be 70% of its book value.
The estimated cost of equity is 12%.
The average P/E ratio of listed companies of similar size to Zinco is 30:1.
Average earnings growth in the industry is 6% per year.

Required:

a. Prepare a report that gives an estimate of Zinco using:
(i) Asset-based valuation (8 Marks)
(ii) P/E ratios (6 Marks)
(iii) Dividend-based valuation (6 Marks)
(iv) The present value of expected future cash flows (5 Marks)
(v) Discuss the potential accuracy of each of the methods used and recommend, with reasons, a value or range of values that PT might bid for Zinco. State clearly any assumptions that you make.

b. The directors of PT are considering issuing some ₦100 nominal value ten-year bonds to finance the purchase of Zinco. To make the bonds look attractive to potential investors, the bonds are to be issued at a discount of 10%. Based on PT’s credit rating, investors are expected to require a return of 7% per year from such bonds.

You are required:
To estimate the coupon rate that PT will have to pay on these bonds in order to satisfy the investors. (5 Marks)

Answer

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Tags: Asset-Based Valuation, Bond pricing, Discounted Cash Flow, Dividend valuation, P/E Ratio
Level: Level 3

Topic: Business Valuation Techniques

CR – May 2021 – L3 – Q5b – Provisions, Contingent Liabilities, and Discounted Cash Flows (IAS 37)

Calculate provisions and charges for emission modifications in 2015 and 2016 for Gama Plastic Limited.

Question

Gama Plastic Limited owns a number of plastic recycling plants in various parts of the country which supply most of the raw material used by Gama Plastic Limited for its production of household and corporate plastic products.

On December 1, 2015, the directors of Gama Plastic Limited announced publicly that it intends to voluntarily reduce the level of harmful emissions from its recycling plants through modifications of the plants.

The average useful economic life of these plants as of December 31, 2015, was 15 years. Gama Plastic Limited charges depreciation in relation to the recycling plants to cost of sales on a straight-line basis.

The directors believe that while the modifications will be effective from early 2016 onward, the actual cash costs of the modifications will be as follows:

Date	Amount (N’000)
December 31, 2016	100,000
December 31, 2017	80,000
December 31, 2018	140,000

No contract was signed until 2016, but Gama Plastic Limited prides itself on its excellent public image and has a well-known reputation for meeting both legal and constructive obligations.

The directors of Gama Plastic Limited believe that it is appropriate to use discounted cash flow techniques and that an appropriate rate would be 10%, with the following discount factors:

Year	PV Factor
1	0.909
2	0.826
3	0.751
4	0.683
5	0.620
6	0.564

Required:

Assuming the actual cash cost of the modification is a reliable estimate, calculate the provisions that should be included in the statement of financial position and the charges to the statement of profit or loss of Gama Plastic Limited in respect of the proposal for each of the years 2015 and 2016. (7 Marks)

Answer

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Tags: Depreciation, Discounted Cash Flow, Emission Modifications, IAS 37, Provisions
Level: Level 3

Topic: Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

CR – Nov 2023 – L3 – SC – Q7 – Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Evaluate Roman Limited's recognition of provision for emission reduction costs, compute the provision amounts, and explain the profit or loss components.

Question

Roman Limited prepares its financial statements in accordance with International Accounting Standards. On March 16, 2017, Roman Limited made a public announcement of a decision to reduce the level of emission of harmful chemicals from its factories. The average useful life of the factories on March 31, 2017 was 25 years. The depreciation of the factories is computed on a straight-line basis and charged to cost of sales. The directors formulated the proposal for emission reduction following an agreement in principle earlier in the year.

The directors prepared detailed estimates of the costs of their proposals, showing the following expenditures:

N60 million on March 31, 2018
N60 million on March 31, 2019
N80 million on March 31, 2020

All estimates were for actual anticipated cash payments. No contracts were entered into until after April 1, 2017. The estimate proved accurate regarding the expenditure due on March 31, 2018. When the directors decided to proceed with this project, they used discounted cash flow techniques to appraise the proposed investment, with an annual discount rate of 8%. The company has a reputation for fulfilling its financial commitments after it has publicly announced them. Roman Limited has made a provision for the expected costs of its proposal in the financial statements for the year ended March 31, 2017.

In accordance with the provisions of IAS 37 – Provisions, Contingent Liabilities, and Contingent Assets:

Required:
a. Explain the decision of the directors of Roman Limited to recognize the provision in the statement of financial position as at March 31, 2017.
(6 Marks)

b. Compute the appropriate provisions in the statement of financial position in respect of the proposed expenditure at March 31, 2017, and March 31, 2018.
(4 Marks)

Compute the TWO components of the charge to the statement of profit or loss in respect of the proposal for the year ended March 31, 2018. You should explain how each component arises and identify where in the statement of profit or loss each component is reported.
(5 Marks)

(Total 15 Marks)

Answer

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Tags: Contingent Liabilities, Depreciation, Discounted Cash Flow, Emission Reduction, Environmental Commitment, IAS 37, Provisions
Level: Level 3

Topic: Provisions, Contingent Liabilities and Contingent Assets (IAS 37)
Series: NOV 2023

BMF – Nov 2014 – L1 – SA – Q9 – Investment Decisions

Identifies which option is not a discounted cash flow investment appraisal technique.

Question

Which of the following is NOT a discounted cash flow investment appraisal technique?
A. Net present value
B. Internal rate of return
C. Profitability index
D. Discounted payback period
E. Payback period

Answer

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Tags: Discounted Cash Flow, Investment Appraisal
Level: Level 1

Topic: Investment Decisions
Series: NOV 2014

PSAF – MAY 2019 – L2 – Q7 – Performance Measurement in the Public Sector

Compare NPV and IRR methods, state decision rules, and apply NPV to evaluate two investment projects for selection.

Question

a. Distinguish between net present value (NPV) and internal rate of return (IRR) and state the decision rule under both criteria. (8 Marks)

b. Two projects A and B have initial capital investment of N900,000 each. The cash inflows of the two projects are as follows:

Required:
i. As a financial analyst, calculate the net present value (NPV) of the two projects given a cost of capital of 12%. (6 Marks)
ii. Based on the results obtained in (i), which of the projects should be chosen? (1 Mark)

Answer

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Tags: Discounted Cash Flow, Internal Rate of Return, Investment Appraisal, Net Present Value, Project Selection
Level: Level 2

Series: MAY 2019

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

BMF – Nov 2021 – L1 – SB – Q5B – Investment Decisions

This question asks candidates to evaluate two investment projects using the Net Present Value (NPV) method.

Question

McPat Investment Limited is considering investing in either of two mutually exclusive projects, namely Axiom and Axis. Each project costs ₦1.5 billion. The cost of capital to the company is 15%. The projected cash flows from the two projects are as stated below:

Year	Axiom (₦’000)	Axis (₦’000)
1	220,000	200,000
2	220,000	200,000
3	240,000	220,000
4	240,000	220,000
5	300,000	340,000
6	300,000	340,000
7	280,000	280,000

You are required to evaluate the projects using the Net Present Value method to decide which one to accept.

Answer

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Tags: Discounted Cash Flow, Investment Appraisal, Net Present Value (NPV), Project Selection
Level: Level 1

Topic: Investment Decisions
Series: NOV 2021

FM – Nov 2024 – L2 – Q4a – Business Valuation

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

Question

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

FM – Nov 2024 – L2 – Q2 – Investment Appraisal

Calculate the NPV of launching two new products, Agbui and Loloi, and advise on the investment decision.

Question

Expected sales volumes (units) for Agbui:

Year	1	2	3	4
Volume	30,000	55,000	50,000	15,000

The first year’s selling price and direct material costs for each Agbui unit will be GH¢31 and GH¢12, respectively. On the other hand, the company expects to sell 25% more Loloi units than Agbui. Both selling price and direct material cost of Loloi are expected to be 25% less than Agbui’s.
Incremental fixed production costs are expected to be GH¢500,000 in the first year of operation, apportioned based on revenue. Advertising costs will be GH¢250,000 in the first year of operation and then GH¢125,000 per year for the following two years.
To produce the two products, an investment of GH¢1 million in machinery and GH¢500,000 in working capital will be needed, payable at the start of the period. Santrofi PLC expects to recover GH¢600,000 from the sale of machinery at the end of the project life. Investment in machinery attracts a 100% first-year tax-allowable depreciation. The company has sufficient profit to take full advantage of the allowance in Year 1. For the purpose of reporting accounting profit, the company depreciates machinery on a four-year straight-line basis.
Revenue and costs are expected to be affected by inflation after the first year as follows:
- Selling price: 3% a year
- Direct material cost: 3% a year
- Fixed production cost: 5% a year
The company’s real discount rate is 10% for investment appraisal. Average inflation is deemed to be 3%. The applicable corporate tax rate is 25%.

Required:
Calculate the Net Present Value (NPV) of the proposed investment in the two products and advise the company on its investment appraisal.

Answer

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Tags: Corporate Tax, Discounted Cash Flow, Inflation, Investment Appraisal, Machinery Investment, Net Present Value
Level: Level 2

Topic: Introduction to Investment Appraisal
Series: Nov 2024

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

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

Question

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

Forecast Profits

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

The following information is relevant:

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

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

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

Answer

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Tags: Acquisition Appraisal, Discounted Cash Flow, Investment Analysis, Profit Forecast, Valuation
Level: Level 3

Topic: Mergers and acquisitions
Series: NOV 2014

FM – May 2021 – L3 – Q1 – Business Valuation Techniques

Evaluate the value of Zinco Limited using various valuation techniques and estimate the coupon rate for bond financing.

Question

Summarized financial statements of Zinco Limited for the last two years are shown below:

Statements of Profit or Loss for the years ended 30 June

	2020 (N’000)	2019 (N’000)
Sales Revenue	112,400	101,090
Opening Profit before exceptional items	6,510	4,100
Exceptional Items	(10,025)	–
Interest Paid (Net)	(1,400)	(890)
Profit/(Loss) before Tax	(4,915)	3,210
Taxation	(1,050)	(890)
Profit/(Loss) after Tax	(5,965)	2,320
Note: Dividend	1,000	500

Statement of Financial Position as at 31 March (N’000)

Additional Information Relating to Zinco:

If the acquisition succeeds, there will be revenue synergy leading to an increase in annual sales revenue of Zinco of 25% for three years, and 10% per year thereafter.
Non-cash expenses, including depreciation, were N4,100,000 in 2020.
Income tax rate is 30% p.a.
Capital expenditure was N5 million in 2020 and is expected to grow at approximately the same rate as revenue.
Working capital, interest payments, and non-cash expenses are expected to increase at the same rate as revenue.
Zinco has a patent with a current market value of N50 million. This has not been included in the non-current assets.
Operating profit is expected to be approximately 8% of revenue in 2021 and to remain at the same percentage in future years.
Dividends are expected to grow at the same rate as revenue.
The realizable value of inventory is expected to be 70% of its book value.
The estimated cost of equity is 12%.
The average P/E ratio of listed companies of similar size to Zinco is 30:1.
Average earnings growth in the industry is 6% per year.

Required:

You are required:
To estimate the coupon rate that PT will have to pay on these bonds in order to satisfy the investors. (5 Marks)

Answer

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Tags: Asset-Based Valuation, Bond pricing, Discounted Cash Flow, Dividend valuation, P/E Ratio
Level: Level 3

Topic: Business Valuation Techniques

CR – May 2021 – L3 – Q5b – Provisions, Contingent Liabilities, and Discounted Cash Flows (IAS 37)

Calculate provisions and charges for emission modifications in 2015 and 2016 for Gama Plastic Limited.

Question

The directors believe that while the modifications will be effective from early 2016 onward, the actual cash costs of the modifications will be as follows:

Date	Amount (N’000)
December 31, 2016	100,000
December 31, 2017	80,000
December 31, 2018	140,000

No contract was signed until 2016, but Gama Plastic Limited prides itself on its excellent public image and has a well-known reputation for meeting both legal and constructive obligations.

The directors of Gama Plastic Limited believe that it is appropriate to use discounted cash flow techniques and that an appropriate rate would be 10%, with the following discount factors:

Year	PV Factor
1	0.909
2	0.826
3	0.751
4	0.683
5	0.620
6	0.564

Required:

Answer

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Tags: Depreciation, Discounted Cash Flow, Emission Modifications, IAS 37, Provisions
Level: Level 3

Topic: Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

CR – Nov 2023 – L3 – SC – Q7 – Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Evaluate Roman Limited's recognition of provision for emission reduction costs, compute the provision amounts, and explain the profit or loss components.

Question

The directors prepared detailed estimates of the costs of their proposals, showing the following expenditures:

N60 million on March 31, 2018
N60 million on March 31, 2019
N80 million on March 31, 2020

In accordance with the provisions of IAS 37 – Provisions, Contingent Liabilities, and Contingent Assets:

Required:
a. Explain the decision of the directors of Roman Limited to recognize the provision in the statement of financial position as at March 31, 2017.
(6 Marks)

b. Compute the appropriate provisions in the statement of financial position in respect of the proposed expenditure at March 31, 2017, and March 31, 2018.
(4 Marks)

(Total 15 Marks)

Answer

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Tags: Contingent Liabilities, Depreciation, Discounted Cash Flow, Emission Reduction, Environmental Commitment, IAS 37, Provisions
Level: Level 3

Topic: Provisions, Contingent Liabilities and Contingent Assets (IAS 37)
Series: NOV 2023

BMF – Nov 2014 – L1 – SA – Q9 – Investment Decisions

Identifies which option is not a discounted cash flow investment appraisal technique.

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Tags: Discounted Cash Flow, Investment Appraisal
Level: Level 1

Topic: Investment Decisions
Series: NOV 2014

PSAF – MAY 2019 – L2 – Q7 – Performance Measurement in the Public Sector

Compare NPV and IRR methods, state decision rules, and apply NPV to evaluate two investment projects for selection.

Question

a. Distinguish between net present value (NPV) and internal rate of return (IRR) and state the decision rule under both criteria. (8 Marks)

b. Two projects A and B have initial capital investment of N900,000 each. The cash inflows of the two projects are as follows:

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Tags: Discounted Cash Flow, Internal Rate of Return, Investment Appraisal, Net Present Value, Project Selection
Level: Level 2

Series: MAY 2019

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

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

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

BMF – Nov 2021 – L1 – SB – Q5B – Investment Decisions

This question asks candidates to evaluate two investment projects using the Net Present Value (NPV) method.

Question

Year	Axiom (₦’000)	Axis (₦’000)
1	220,000	200,000
2	220,000	200,000
3	240,000	220,000
4	240,000	220,000
5	300,000	340,000
6	300,000	340,000
7	280,000	280,000

You are required to evaluate the projects using the Net Present Value method to decide which one to accept.

Answer

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Tags: Discounted Cash Flow, Investment Appraisal, Net Present Value (NPV), Project Selection
Level: Level 1

Topic: Investment Decisions
Series: NOV 2021

Question Tag: Discounted Cash Flow

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FM – Nov 2024 – L2 – Q4a – Business Valuation

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Calculate the NPV of launching two new products, Agbui and Loloi, and advise on the investment decision.

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

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Evaluate the value of Zinco Limited using various valuation techniques and estimate the coupon rate for bond financing.

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CR – May 2021 – L3 – Q5b – Provisions, Contingent Liabilities, and Discounted Cash Flows (IAS 37)

Calculate provisions and charges for emission modifications in 2015 and 2016 for Gama Plastic Limited.

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CR – Nov 2023 – L3 – SC – Q7 – Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Evaluate Roman Limited's recognition of provision for emission reduction costs, compute the provision amounts, and explain the profit or loss components.

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BMF – Nov 2014 – L1 – SA – Q9 – Investment Decisions

Identifies which option is not a discounted cash flow investment appraisal technique.

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PSAF – MAY 2019 – L2 – Q7 – Performance Measurement in the Public Sector

Compare NPV and IRR methods, state decision rules, and apply NPV to evaluate two investment projects for selection.

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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.

Statement of profit or loss for the year ended 30 September, 2019

Statement of changes in equity (extracts) for the year ended 30 September, 2019

Statement of Financial Position as at 30 September, 2019

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BMF – Nov 2021 – L1 – SB – Q5B – Investment Decisions

This question asks candidates to evaluate two investment projects using the Net Present Value (NPV) method.

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FM – Nov 2024 – L2 – Q4a – Business Valuation

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

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FM – Nov 2024 – L2 – Q2 – Investment Appraisal

Calculate the NPV of launching two new products, Agbui and Loloi, and advise on the investment decision.

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

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

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FM – May 2021 – L3 – Q1 – Business Valuation Techniques

Evaluate the value of Zinco Limited using various valuation techniques and estimate the coupon rate for bond financing.

Statements of Profit or Loss for the years ended 30 June

Additional Information Relating to Zinco:

Required:

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CR – May 2021 – L3 – Q5b – Provisions, Contingent Liabilities, and Discounted Cash Flows (IAS 37)

Calculate provisions and charges for emission modifications in 2015 and 2016 for Gama Plastic Limited.

Required:

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CR – Nov 2023 – L3 – SC – Q7 – Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Evaluate Roman Limited's recognition of provision for emission reduction costs, compute the provision amounts, and explain the profit or loss components.

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BMF – Nov 2014 – L1 – SA – Q9 – Investment Decisions

Identifies which option is not a discounted cash flow investment appraisal technique.

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PSAF – MAY 2019 – L2 – Q7 – Performance Measurement in the Public Sector

Compare NPV and IRR methods, state decision rules, and apply NPV to evaluate two investment projects for selection.

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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.

Statement of profit or loss for the year ended 30 September, 2019

Statement of changes in equity (extracts) for the year ended 30 September, 2019

Statement of Financial Position as at 30 September, 2019

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BMF – Nov 2021 – L1 – SB – Q5B – Investment Decisions