Question Tag: Net Asset Basis

Kudus Ltd (Kudus) is an unlisted agro-processing company which operates locally within the Middle Belt. Amartey Mutual Funds Ltd has identified Kudus as a target firm and would like to estimate its worth for the purpose of acquisition.

The following financial summaries relate to Kudus as at 31 March 2022:

Number of authorised ordinary shares: 30 million

Additional information:

1. Kudus has the following ordinary dividends:

Kudus has correctly accounted for ordinary dividends in the financial statements.

2. The preference shares are irredeemable.
3. Due diligence was carried out on Kudus as at 12 April 2022 and the following were identified which may necessitate the revision of the draft profit:
   • Non-current assets include Kudus’s office building with a carrying value of GH¢95 million. The building is estimated to have a fair value of GH¢160 million if used for rental purposes, and GH¢180 million if used for industrial purposes. The rental value is before considering substantial rework required to be carried out on the property. The location of the property currently makes it legally impermissible to use it for industrial activities. The market value of the building in its current use is estimated at GH¢120 million. A plant with a carrying value of GH¢10 million is not in usable condition but could be scrapped for GH¢2 million. The value of the remaining plant and equipment has not changed.
   • Non-current assets of Kudus include a four-year secured debenture carried at its year-end amortised cost. No allowance was made for credit losses against this investment as the directors believed that the investment was exposed to only minimal risk of default. At year-end, allowance based on lifetime expected credit loss was estimated at GH¢1.8 million while allowance for next-12 months’ expected credit loss was assessed at GH¢1 million.
   • The current assets include an amount due from a customer totalling GH¢20 million which has been outstanding for the last two years due to a dispute with the customer. No provision was made in relation to this. The auditors have qualified the audit report to this effect. With several follow-up activities, the customer as at 31 March 2022 has agreed to pay GH¢8 million at 31 March 2023 and GH¢4 million at 31 March 2024. However, Kudus has decided to file a case against the customer to recover the entire amount due by 31 March 2025.
   • Non-current liability represents three-year 5% GH¢50 million loan notes issued on 1 April 2021 at nominal value when their effective interest rate was 7% because of a large premium at redemption. Kudus has taken the “fair value option” for these notes. At 31 March 2022, fair value of the notes based on a widely used valuation model is GH¢47 million and based on inputs drawn from a vibrant market is GH¢49 million. No fair value change is attributable to Kudus’s own credit risk. Coupon has been paid and charged to income statement.
4. The following details relate to Bukari Plc, a listed firm which operates in the same sector as Kudus:

5. Assume discount rate of 10% and unlisted firm risk factor of 20%.

Required:

Determine a range of values for each ordinary share of Kudus using:

i) Net Assets basis.
(6 marks)

ii) Price/Earnings basis.
(5 marks)

iii) Dividend Yield basis.
(4 marks)

(Note: Ignore tax implications)