Equity – Page 5 – NBC Institute

FM – Nov 2022 – L3 – Q5 – Business Valuation Techniques

Calculate the equity value of APL using SVA and outline three methods for funding the MBO.

Question

Aderupoko Plc (ADP), a large listed media group, has been the holding company of Adamu Publishers Limited (APL) since 2015. The publishing company (APL) is 100% owned by ADP since inception.

Recently, the directors of APL informed ADP’s board of their readiness to make a management buy-out (MBO) of APL. Accordingly, ADP’s board decided to value APL using the shareholder value analysis method (SVA). ADP’s board estimates that APL has a four-year competitive advantage over its competitors (to 30 September 2024) and the following data regarding APL’s value drivers and additional financial information has been collected:

Year to 30 September	2021	2022	2023	2024	2025+
Sales growth (%)	5%	4%	3%	2%	0%
Operating profit margin	8%	9%	10%	10%	10%
Incremental non-current asset investment (% of sales increase)	5%	6%	3%	2%	0%
Incremental working capital investment (% of sales increase)	6%	5%	4%	4%	0%

Financial Information:

Sales for the current year to 30 September 2020: ₦80 million
Annual depreciation (equal to annual replacement of non-current asset expenditure): ₦2.0 million
Par value of 6% debentures in issue (current market value ₦95.00, nominal value ₦100): ₦10.0 million
Short-term investments held: ₦0.8 million
Company tax rate: 20%
Current WACC: 10%

Required:

a. Calculate the value of APL’s equity using SVA.

(12 Marks)

b. Outline three methods by which APL’s directors might raise the funds necessary for the proposed MBO of the company. (3 Marks)

(Total 15 Marks)

Answer

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Tags: Competitive Advantage, Equity, Funding Methods, MBO, SVA, Valuation
Level: Level 3

Topic: Business Valuation Techniques
Series: NOV 2022

BL – Nov 2020 – L1 – SA – Q3 – Partnership Law

Objective questions testing knowledge on Nigerian government functions, customary law, and partnership structures.

Question

A partnership in which all members are involved in the management of the firm’s business is
A. General partnership
B. Government partnership
C. Limited partnership
D. Active partnership
E. Supreme partnership

Answer

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Tags: Equity, Natural Justice, Partnership Types
Level: Level 1

Topic: Partnership Law
Series: NOV 2020

FR – May 2017 – L2 – SB – Q5 – Preparation of Financial Statements

Discuss distinguishing features of debt and equity presentation under IFRS and explain the impact of classification on financial statements.

Question

The difference between debt and equity in an entity’s statement of financial position is not easily distinguishable for preparers of financial statements. Debts and equity financial instruments may have similar characteristics, which may lead to inconsistency of reporting.

Required:

Discuss the main distinguishing features in the presentation of debt and equity under International Financial Reporting Standards (IFRS) with clear examples.
(10 Marks)
Explain why it is important for entities to understand the impact of the classification of a financial instrument as debt or equity in the financial statement.
(5 Marks)

Answer

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Tags: Classification, Consistency, Debt, Equity, Financial instruments, IFRS, Presentation
Level: Level 2

Topic: Preparation of Financial Statements
Series: MAY 2017

FR – May 2024 – L2 – SB – Q6 – Financial Instruments (IAS 32)

Discuss how to treat transactions of debt and equity instruments in Akwa Nig. Limited under IAS 32.

Question

Akwa Nig. Limited is a private limited company planning to be registered with the Nigeria Exchange Limited (NGX). The company is engaged in the conversion of petrol engines into compressed gas engines.

The following are the transactions of the company in respect of its debts and equity instruments.

Transaction 1:
Akwa Nig. Limited issued 40 million non-redeemable N1 preference shares at par value. Under the terms relating to the preference shares, a dividend is payable on the preference shares only if Akwa Nig. Limited also pays a dividend on its ordinary shares for the same period. (5 Marks)

Transaction 2:
Akwa Nig. Limited entered into a contract with a supplier to buy a significant item of equipment. Under the terms of the agreement, the supplier will receive ordinary shares with an equivalent value of N5 million one year after the equipment is delivered. (5 Marks)

Transaction 3:
The directors of Akwa Nig. Limited, on becoming directors, are required to invest a fixed agreed sum of money in a special class of N1 ordinary shares that only directors hold. Dividend payments on the shares are discretionary and are ratified at the Annual General Meeting (AGM) of the company. When a director’s service contract expires, Akwa Nig. Limited is required to repurchase the shares at their nominal value. (5 Marks)

A senior accountant in your company (Akwa Nig. Limited) has asked for your advice on how the above transactions should be treated in the financial statements of your company in accordance with IAS 32 – Financial Instruments: Presentation.

Required:
Write a memo on the above request, discussing and justifying how each of the transactions should be treated in the financial statements, in accordance with IAS 32 – Financial Instruments: Presentation.

Answer

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Tags: Debt, Equity, Financial instruments, Financial Statements, IAS 32, Preference shares
Level: Level 2

Topic: Financial Instruments (IAS 32, IFRS 9)
Series: MAY 2024

FR – Nov 2015 – L2 – Q5 – Consolidated Financial Statements (IFRS 10)

Prepare the consolidated statement of financial position and calculate goodwill and non-controlling interest for UDO Group Plc.

Question

The trial balance of UDO Plc and its subsidiary, ALOMA Plc, as at December 31, 2014, is given below:

UDO Plc acquired 75% of ALOMA Plc on January 1, 2014, for N1,300,000,000, when the retained earnings of ALOMA Plc were N600 million and the share premium was N170 million. Neither the acquisition nor the loan notes obtained to finance the purchase were recorded in the trial balance. There has been no impairment of goodwill, and no change in share capital since acquisition. It is the group policy to value the non-controlling interest at fair value, which was estimated to be N160 million.

Required:
Prepare the consolidated statement of financial position of UDO Group Plc as at December 31, 2014.

Answer

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Tags: consolidated financial statements, Equity, Goodwill, Group Accounts, IFRS 10, Non-Controlling Interest
Level: Level 2

Topic: Consolidated Financial Statements (IFRS 10)
Series: NOV 2015

BL – May 2012 – L1 – SA – Q1 – Sources of Nigerian Law

Identifying the problem equity sought to address in common law.

Question

Which problem of common law was equity developed to solve?

A. Age
B. Weight
C. Power
D. Harshness
E. Hegemony

Answer

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Tags: Business Law, Common Law, Equity, Nigerian Legal System
Level: Level 1

Topic: Sources of Nigerian Law
Series: MAY 2012

BL – Nov 2012 – L1 – SB – Q1A – Introduction to Law

List the seven key maxims of equity.

Question

State SEVEN maxims of equity.

Answer

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Tags: Equity, Legal Concepts, Maxims
Level: Level 1

Topic: Introduction to Law
Series: NOV 2012

TAX – May 2021 – L1 – SA – Q1 – Introduction to Taxation

Multiple-choice question assessing knowledge of the principles of taxation.

Question

Which of the following is NOT a principle of taxation?
A. Equity
B. Certainty
C. Convenience
D. Simplicity
E. Residency

Answer

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Tags: Certainty, Convenience, Equity, Residency, Simplicity, Tax Principles
Level: Level 1

Topic: Introduction to Taxation
Series: MAY 2021

BL – Nov 2012 – L1 – SA – Q1 – Sources of Nigerian Law

Identify which of the options is not a Nigerian statute.

Question

Which of the following is NOT a Nigerian statute?

A. Equity
B. Decree
C. Act of Parliament
D. Edict
E. Bye-law

Answer

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Tags: Acts of Parliament, Equity, Legal Systems, Nigerian Statutes
Level: Level 1

Topic: Sources of Nigerian Law
Series: NOV 2012

FA – Nov 2012 – L1 – SB – Q40 – Elements of Financial Statements

Calculate the dividend payable to ordinary shareholders.

Question

If a 10% dividend is approved, what is the dividend payable to ordinary shareholders?

Answer

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Tags: Dividends, Equity, Shareholders
Level: Level 1

Topic: Elements of Financial Statements
Series: NOV 2012

PSAF – May 2018 – L2 – Q5d – Financial Statements Discussion and Analysis

Discuss the basis for measuring public sector performance and justify why governments can be assessed at the end of their tenure.

Question

One of the key performance indicators (KPI) in the private sector is to determine the profitability of a business. This is because businesses exist to make a profit. However, in the Public Sector, the objective of governments is to provide public goods and as such, satisfy the needs of the citizens. Citizens are invariably dissatisfied with government performance at the end of its term of office. This is because most of the objectives of government are social in nature and as such, it becomes very difficult to match government revenues and expenditure to determine profit or loss as a basis of measuring its performance.

Required:
Discuss the basis for measuring Public Sector performance and justify why governments can be assessed at the end of their tenure of office.

Answer

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Tags: Economy, Effectiveness, Efficiency, Equity, Public Sector Performance, Value for Money
Level: Level 2

Topic: Financial Statements Discussion and Analysis
Series: MAY 2018

FM – April 2022 – L2 – Q1b – Capital structure

Calculate the capital structure of Boom Ltd and determine the earnings required to achieve a 25% return for equity holders.

Question

Boom Ltd is into the provision of online conference call facilities which has become popular due to the rising trend in Covid-19 cases in Ghana. The company has 10 million issued shares currently at GH¢50 each, 3 million preference shares trading at GH¢25 each, and 5,000 bonds also trading at GH¢600 each.

Required:
i) Calculate the Capital Structure of the Company. (4 marks)
ii) How much should the company earn annually to achieve a return of 25% per annum on capital employed for equity holders if the dividend rate on preference shares per annum is 20% and the coupon on the bonds is 18%? In Ghana, interest paid on debt is tax deductible and corporate tax is at 25%. (6 marks)

Answer

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Tags: Bonds, Capital structure, Cost of Capital, Equity, Preference shares, Return on Capital Employed
Level: Level 2

Topic: Capital structure
Series: APR 2022

FM – MAY 2019 – L2 – Q2a – Capital structure

Calculate the current market capitalization of M&E Ltd and the Weighted Average Cost of Capital (WACC) prior to financing a new project.

Question

Question:
M&E Ltd, recognized as the leader in steel manufacturing, has received an invitation to supply steel for the construction of rail lines to connect the ECOWAS countries, starting from Nigeria. The contract will be for 10 years, and management is considering appraising the investment to enable them to present their proposals for the contract. The following information was extracted from the recently published accounts of M&E Ltd:

	GH¢ ‘000
Equity Shares (1,000,000 shares)	70,000
15% Preference shares	50,000
10% (Bonds irredeemable)	30,000
Total	150,000

The Treasury unit of M&E Ltd has estimated that it will require GH¢ 10 million to finance the new project. The total amount would be raised through 10% Irredeemable bonds at the current market price. The cost of Preference shares and Bonds will not change, but equity shareholders will demand an increase of 20% on the current cost of equity.

M&E Ltd has a beta of 0.8, the market risk premium for the steel industry is 6.25%, and the Government of Ghana Bond rate is 20%. The current market price for Irredeemable Bonds of GH¢1,000 nominal value is GH¢850.

M&E Ltd’s dividend policy is to pay constant dividends, and this policy will not change in the foreseeable future. The recent dividend paid was GH¢20 per share. M&E Ltd is a Free Zones Company and therefore pays tax at a rate of 8%.

Required:

i) Calculate the current market capitalization of M&E Ltd. (5 marks)

ii) Calculate the Weighted Average Cost of Capital (WACC) prior to the consideration of the finance for the proposed project. (9 marks)

(Total: 14 marks)

Answer

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Tags: Beta, Bonds, Equity, Market capitalization, Market risk premium, Preference shares, Weighted Average Cost of Capital (WACC)
Level: Level 2

Topic: Capital structure
Series: MAY 2019

Question Tag: Equity

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FM – Nov 2022 – L3 – Q5 – Business Valuation Techniques

Calculate the equity value of APL using SVA and outline three methods for funding the MBO.

BL – Nov 2020 – L1 – SA – Q3 – Partnership Law

Objective questions testing knowledge on Nigerian government functions, customary law, and partnership structures.

FR – May 2017 – L2 – SB – Q5 – Preparation of Financial Statements

Discuss distinguishing features of debt and equity presentation under IFRS and explain the impact of classification on financial statements.

FR – May 2024 – L2 – SB – Q6 – Financial Instruments (IAS 32)

Discuss how to treat transactions of debt and equity instruments in Akwa Nig. Limited under IAS 32.

FR – Nov 2015 – L2 – Q5 – Consolidated Financial Statements (IFRS 10)

Prepare the consolidated statement of financial position and calculate goodwill and non-controlling interest for UDO Group Plc.

BL – May 2012 – L1 – SA – Q1 – Sources of Nigerian Law

Identifying the problem equity sought to address in common law.

BL – Nov 2012 – L1 – SB – Q1A – Introduction to Law

List the seven key maxims of equity.

TAX – May 2021 – L1 – SA – Q1 – Introduction to Taxation

Multiple-choice question assessing knowledge of the principles of taxation.

BL – Nov 2012 – L1 – SA – Q1 – Sources of Nigerian Law

Identify which of the options is not a Nigerian statute.

FA – Nov 2012 – L1 – SB – Q40 – Elements of Financial Statements

Calculate the dividend payable to ordinary shareholders.

PSAF – May 2018 – L2 – Q5d – Financial Statements Discussion and Analysis

Discuss the basis for measuring public sector performance and justify why governments can be assessed at the end of their tenure.

FM – April 2022 – L2 – Q1b – Capital structure

Calculate the capital structure of Boom Ltd and determine the earnings required to achieve a 25% return for equity holders.

FM – MAY 2019 – L2 – Q2a – Capital structure

Calculate the current market capitalization of M&E Ltd and the Weighted Average Cost of Capital (WACC) prior to financing a new project.

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FM – Nov 2022 – L3 – Q5 – Business Valuation Techniques

Calculate the equity value of APL using SVA and outline three methods for funding the MBO.

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BL – Nov 2020 – L1 – SA – Q3 – Partnership Law

Objective questions testing knowledge on Nigerian government functions, customary law, and partnership structures.

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FR – May 2017 – L2 – SB – Q5 – Preparation of Financial Statements

Discuss distinguishing features of debt and equity presentation under IFRS and explain the impact of classification on financial statements.

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FR – May 2024 – L2 – SB – Q6 – Financial Instruments (IAS 32)

Discuss how to treat transactions of debt and equity instruments in Akwa Nig. Limited under IAS 32.

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FR – Nov 2015 – L2 – Q5 – Consolidated Financial Statements (IFRS 10)

Prepare the consolidated statement of financial position and calculate goodwill and non-controlling interest for UDO Group Plc.

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BL – May 2012 – L1 – SA – Q1 – Sources of Nigerian Law

Identifying the problem equity sought to address in common law.

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BL – Nov 2012 – L1 – SB – Q1A – Introduction to Law

List the seven key maxims of equity.

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TAX – May 2021 – L1 – SA – Q1 – Introduction to Taxation

Multiple-choice question assessing knowledge of the principles of taxation.

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BL – Nov 2012 – L1 – SA – Q1 – Sources of Nigerian Law

Identify which of the options is not a Nigerian statute.

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FA – Nov 2012 – L1 – SB – Q40 – Elements of Financial Statements

Calculate the dividend payable to ordinary shareholders.

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PSAF – May 2018 – L2 – Q5d – Financial Statements Discussion and Analysis

Discuss the basis for measuring public sector performance and justify why governments can be assessed at the end of their tenure.

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FM – April 2022 – L2 – Q1b – Capital structure

Calculate the capital structure of Boom Ltd and determine the earnings required to achieve a 25% return for equity holders.

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FM – MAY 2019 – L2 – Q2a – Capital structure

Calculate the current market capitalization of M&E Ltd and the Weighted Average Cost of Capital (WACC) prior to financing a new project.

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