Question Tag: Market Capitalisation

Mr. Asare Jones inherited the Mindsworth Textile Company Ltd (Mindsworth), an unlisted company, from his Father. The company has 1,000,000 shares which are solely owned by Mr. Asare Jones. For the past five years, profits have fallen below the industry average, with a growth rate of only 2%, while the industry average is more than twice this rate.

Mr. Asare Jones has been approached by Indiana Textiles Ltd (Indiana), a competitor, with a bid to take over the assets and liabilities of Mindsworth in exchange for 800,000 shares in Indiana. The shares would add up to Indiana’s existing 7,200,000 shares. Indiana’s shares are currently valued at GH¢9.50 per share.

Meanwhile, Obiba Management Associates (OMA), a corporate finance consultancy firm, has offered GH¢3,000,000 to take up 49% of the shares of Mindsworth and grow the company’s current earnings of GH¢850,000 per the last financial year by 5% in the first three years and after that, 3% into perpetuity.

Mr. Asare Jones, after assessing the risks associated with the various options, has revised his current expected rate of return of 15%. This is to increase by three percentage points for the offer from Indiana and five percentage points for the offer from OMA.

Required:
a) With appropriate computations, advise Mr. Asare Jones on the following:
i) The benefits and risks associated with each of the options available, including not accepting any of the offers. (12 marks)
ii) Advise on the best option to take. (2 marks)

b) Distinguish between the value of a company and the market capitalisation of a company. (3 marks)
c) Explain THREE (3) challenges Mr. Asare Jones will face with the valuation of his unlisted company in the textile industry. (3 marks)