Question Tag: Dividend valuation

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FM – May 2023 – L3 – Q2 – Business Valuation Techniques

Analyze AHP’s intrinsic value using fundamental and technical analysis, apply the dividend valuation model, and evaluate EMH implications.

Question

You are a Financial Analyst at Tayo Research Group (TRG). You begin valuing Aba Hotels Plc (AHP), a thinly and infrequently traded stock currently selling at 217 kobo, cum 2021 dividend.

For estimating AHP’s required return on equity, TRG uses the capital asset pricing model (CAPM) approach, but you think its equity beta of 1.20 is not reliable because of the stock’s extremely thin trading volume. You have therefore obtained the beta and other pertinent data for Eko Hotel Plc (EHP) – (See Table 1), a midsized company in the same industry with high liquidity trading on the Nigerian Stock Exchange.

Table 1: Valuation Data for EHP

Parameter	Value
Asset beta	0.763
Debt beta	0.150
Debt ratio (D/D+E)	0.60
Effective tax rate (%)	30%

Summarised financial data for AHP is shown below:

Statement of Profit or Loss Account

Year	2019	2020	2021*
Sales (₦’000)	305,500	357,600	409,200
Taxable income (₦’000)	40,500	49,000	56,700
Taxation (₦’000)	(14,175)	(17,150)	(19,845)
Post-tax income (₦’000)	26,325	31,850	36,855
Dividend (₦’000)	(9,340)	(10,228)	(11,200)
Retained earnings (₦’000)	16,985	21,622	25,655

Statement of Financial Position

Year	2021*
Non-current assets (₦’000)	216,800
Current assets (₦’000)	158,000
Current liabilities (₦’000)	(104,800)
Net assets (₦’000)	270,000
Ordinary shares (₦0.50 par value)	80,000
Reserves (₦’000)	130,000
15% Bond 2026 (₦100 par value)	60,000

(*2021 figures are unaudited)

Other Relevant Information:

It has been estimated that the debt/equity ratio of AHP is 0.16 and the beta of its debt is 0.2.
The risk-free rate is 12% and the market risk premium is 5%.
AHP has an effective tax rate of 35%.
As a result of recent capital investment, stock market analysts expect post-tax earnings and dividends to increase by 25% for two years and then revert to the company’s existing growth rates.

Required:

a. Stock market analysts sometimes use fundamental analysis and sometimes technical analysis to forecast future share prices.
What are fundamental analysis and technical analysis? (4 Marks)

b. Using the dividend valuation model, estimate what a fundamental analyst might consider to be the intrinsic (or realistic) value of the company’s shares.
Comment upon the significance of your estimate for the fundamental analyst. (12 Marks)

c. Explain whether your answer to (b) above is consistent with the semi-strong and strong forms of the efficient markets hypothesis (EMH), and comment upon whether financial analysts serve any useful purpose in an efficient market. (4 Marks)

Answer

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Tags: CAPM, Dividend valuation, Efficient Markets, Fundamental Analysis, Technical Analysis
Level: Level 3

Topic: Business Valuation Techniques

AA – May 2017 – L2 – SC – Q5 – Internal Control Systems

Examination of internal control meaning, examples, and sources of audit evidence for completeness, ownership, and valuation.

Question

You are the Auditor of Bistro Bottling Limited (BBL), a major manufacturer and distributor of fruit juice drinks based in Lagos. A review of the previous year’s audit working papers revealed some weaknesses in internal controls with regard to safeguarding the company’s non-current assets.

The company uses a combination of both owned and leased motor vehicles for operational activities, including deliveries to customers. It has recently sold some old vehicles and bought new ones in a bid to lower motor vehicle running expenses.

During the planning of the audit, you have decided that motor vehicles will be a key area because of the likelihood of weaknesses in the company’s system of internal control over non-current assets.

You are required to:

(a) Explain with suitable illustration the meaning of Internal Control. (4 Marks)
(b) List FIVE examples of internal controls. (5 Marks)
(c) Identify TWO sources of audit evidence you will obtain for each of the following: completeness, ownership, and valuation, to provide reasonable assurance with regard to the company’s assets and liabilities. (6 Marks)

Answer

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Tags: Audit evidence, Completeness, Dividend valuation, Internal Control, Non-current Assets, Ownership, Valuation
Level: Level 2

Topic: Internal Control Systems
Series: MAY 2017

CR – Nov 2023 – L3 – Q4a – Business Valuation

Determine appropriate valuation methods and price range for Odenkey Plc based on financial statements and additional information provided.

Question

a) The Directors of Odenkey Plc have decided to sell their business and have begun a search for organisations interested in the purchase. As a Consultant, you have been asked to determine the appropriate range of price per share suitable for the company. Relevant information is as follows:

Additional information:

The receivables include GH¢12,000,000 of revenue for credit sales made on a ‘sale or return’ basis. On 31 December 2022, customers who had not paid for the goods, had the right to return GH¢5,000,000 worth of them. Odenkey Plc applied a markup on cost of 25% on all these sales. Based on previous transactions, it is expected that 80% of the goods will be returned.
The property, plant and equipment includes a building that was originally acquired for GH¢20,000,000 five years ago with an initial estimated useful life of 20 years. The property was revalued to GH¢18,000,000 as at 31 December 2022, and the revaluation reserve is yet to be recognised in the financial statement. Due to degradation of the land on which the building stands, the company undertook an impairment review and it was found that, the fair value of the property as at 31 December 2022 is estimated to be GH¢17,000,000. The value in use of the property is calculated as being GH¢16,000,000.
The patent was originally acquired 2 years ago and the rights were set at 50 years from the date the patent was originally purchased. The patent was amortised by Odenkey Plc using straight line method over the remaining copyright period. However, recent legislative changes passed on 1 January 2022 have extended the patent period forever. The Research and Development departments projects net future cashflow of GH¢4,500,000 per year from the patent even though the prices of similar patents on the market are valued at GH¢ 18,500,000.
The company had a retained earnings balance of GH¢5,000,000 as at 31 December 2021. It has always practiced a dividend payout ratio of 35% when it makes profit during the year.
The following information relates to Odenkey Plc and a competitor Odafomtim Ltd: Odenkey Plc Odafomtim Ltd Number of Shares 3,000,000 500,000 5 years’ average sales growth 8% 9% 5 years’ average growth in EBIT 6% 10.5% P/E ratio as at 31 December 2022 – 18.61 Estimated return on equity 9.5% 12%
The company’s cost of capital is 25%.
Odafomtim Ltd is a listed firm and has a sizeable market share.

Required:

i) Use the information provided to suggest FOUR (4) valuations which prospective purchasers might make.

(12 marks)

ii) Comment on the appropriateness of the range of price per share of Odenkey Plc that the Directors can offer.

(3 marks)

Answer

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

Topic: Business valuations
Series: NOV 2023

CR – Nov 2017 – L3 – Q3b – Business Valuation

Estimate the value per share of Agos Limited using net assets, dividend valuation, and P/E ratio methods.

Question

Santader Limited intends to take over Agos Limited. The financial statements of Agos Limited for the year ended 30 June 2016 are as follows:

Here are the tables from Question 3b exactly as they appear in the attachment:

Agos Limited – Income Statement for the year ended 30 June, 2016

Description	Amount (GH¢)
Profit before tax	450,000
Tax	(125,000)
Profit after tax	325,000

Agos Limited – Statement of Retained Earnings for the year ended 30 June 2016

Description	Amount (GH¢)
Balance at beginning	250,000
Profit after tax	325,000
Dividend paid	(180,000)
Balance at end	395,000

Additional Information
Turnover, profits before tax, and dividends of Agos Limited over the past 5 years:

Year Ending 30 June	Sales (GH¢)	Pre-tax Profits (GH¢)	Dividend (GH¢)
2012	5,800,000	250,000	65,000
2013	6,900,000	320,000	80,000
2014	7,700,000	330,000	100,000
2015	8,500,000	410,000	120,000
2016	9,800,000	450,000	180,000

The patent represents a license to produce and sell a special product. This product is expected to generate a pre-tax profit of GH¢12,000 per annum in perpetuity.
The discount rate of Agos Limited is 10% per annum.
Nhyira Limited, a major competitor of Agos Limited, is listed on the Stock Exchange and has a P/E ratio of 8 and a dividend yield of 10%.
Nhyira Limited expects a return of 11% of the net assets.

Required:
Estimate the value per share of Agos Limited as at 30 June, 2016 using the following methods:
i) Net Assets
ii) Dividend Valuation
iii) Price/earning ratio

Answer

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Tags: Business Valuation, Dividend valuation, Net Assets, Price-Earnings ratio
Level: Level 3

Topic: Business valuations
Series: NOV 2017

FM – March 2023 – L2 – Q1b – Discounted cash flow | Dividend Policy

Calculate the value of a share for Oliso Ghana Ltd using projected dividend growth rates and the total value for an investor holding 1,500 shares.

Question

Oliso Ghana Ltd paid a dividend of GH¢120 per share two years ago. In the previous and current year, dividend grew by 10% per annum. Starting from next year, dividend is projected to grow by 15% for the next three years and then 10% for another three years and finally settling at 12% forever. The investors expect 20% returns.

Required:
i) Calculate the value of a share in cedis for Oliso Ghana Ltd. (8 marks)
ii) If an investor holds 1,500 shares of the company, what will be the total value in cedis? (2 marks)

Answer

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Tags: Discounted Cash Flow, Dividend valuation, Growth rates, Stock valuation
Level: Level 2

Topic: Discounted cash flow, Dividend Policy
Series: MAR 2023

FM – May 2023 – L3 – Q2 – Business Valuation Techniques

Analyze AHP’s intrinsic value using fundamental and technical analysis, apply the dividend valuation model, and evaluate EMH implications.

Question

You are a Financial Analyst at Tayo Research Group (TRG). You begin valuing Aba Hotels Plc (AHP), a thinly and infrequently traded stock currently selling at 217 kobo, cum 2021 dividend.