- 15 Marks
FM – MAY 2017 – L2 – Q5 – Business valuations
Calculate the value of FCH Bank Ltd. using net asset value, dividend growth model, and earnings yield method, and analyze Kantamanso Ltd's financial ratios.
Question
a) Recent financial information of FCH Bank Ltd., a listed company, is as follows:
Financial analysts have forecasted that the dividends of FCH Bank Ltd. will grow in the future at a rate of 4% per year. This is slightly less than the forecast growth rate of the profit after tax (earnings) of the company, which is 5% per year. The finance director of FCH Bank Ltd. thinks that, considering the risk associated with expected earnings growth, an earnings yield of 11% per year can be used for valuation purposes. FCH Bank Ltd. has a cost of equity of 10% per year and a before-tax cost of debt of 7% per year. The 8% bonds will be redeemed at nominal value in six years’ time. FCH Bank Ltd. pays tax at an annual rate of 30% per year and the ex-dividend share price of the company is GH¢8.50 per share.
Required:
Calculate the value of FCH Bank Ltd. using the following methods:
i) Net asset value method;
ii) Dividend growth model;
iii) Earnings yield method.
(9 marks)
b) Kantamanso Ltd, which operates in the Distribution sector in Ghana, has provided the following information for the year ended 31 December 2015:
| No of Shares | Market Value (GH¢) |
|---|---|
| 10% cum preference shares | 18,000 |
| Ordinary Shares | 15,000 |
The proposed dividend for the year is GH¢0.3 for the preference shares and GH¢0.45 for ordinary shares each. The company’s chargeable profit was GH¢40,000 and the profit before taxation was GH¢38,000. The tax rate is 25% for both the company and the individual.
| Financial Data | GH¢m |
|---|---|
| Profit after tax (earnings) | 66.6 |
| Dividends | 40.0 |
| Statement of financial position information | |
| Non-current assets | 595 |
| Current assets | 125 |
| Total assets | 720 |
| Current liabilities | 70 |
| Equity | |
| Ordinary share (GH¢1 nominal) | 80 |
| Reserves | 410 |
| Non-current liabilities | |
| 6% Bank loan | 40 |
| 8% Bonds (GH¢100 nominal) | 120 |
| Total liabilities | 160 |
Required:
Calculate in respect of ordinary shares:
i) Dividend cover
ii) Earnings per share
iii) Price/earnings ratio
(6 marks)
Find Related Questions by Tags, levels, etc.