Net Asset Value – NBC Institute

CR – July 2024 – L3 – Q4a – Business Valuation

Determine a range of values for Alomo's equity in Bediako Metals Ltd using three valuation bases: Net assets, Earnings, and Dividend yield.

Question

Question:

Alomo Investments and Financial Services (Alomo) is a locally based investment portfolio firm which holds several financial assets across different industries in Ghana. Alomo holds some equity assets in Bediako Metals Ltd (Bediako). Currently, Alomo is preparing its financial statements and would like to know the fair value of its current year-end 20% equity holdings in Bediako based on the latter’s recently available financial data (for the year ended 31 December 2021) provided below:

Items	GH¢ million
Tangible assets	895
Non-current financial assets	150
Current assets	485
Total liabilities (including all redeemable preference share capital)	750
Irredeemable preference share capital	100
Draft profit after tax	170

Additional information:

At year-end, the entity had to make a downward revision of decommissioning provision relating to one of its plants as both the expected cash outflows and the current-market rate discount rate were reassessed. Reduction of GH¢40 million (appropriately discounted) has been used to revise the liability and same credited to profit or loss.
Bediako holds some 3-year bonds which are measured at fair value through other comprehensive income. Coupon and effective interest rates, which are the same, have been correctly dealt with. The carrying value of these bonds is GH¢92 million, and the bonds are yet to be revised to reflect their year-end fair value. For the purpose of obtaining the appropriate fair value in line with IFRS 13: Fair value measurement, the following information has been obtained:

Reference to most advantageous market	GH¢ million
Quoted market prices	120
Quoted market prices (with minor adjustment)	85
Based on own model	140

The directors of Bediako Ltd have refused to agree with their external auditors to a reduction in the year-end inventory value for the firm’s main product. As a result, the auditors have issued a qualified opinion on the financial statements. The items in question are being included in current assets at the cost of GH¢200 million. The auditors noted during their subsequent event procedures that 90% of these items had been sold for 95% of their cost.
The directors also failed to cooperate with the Finance Director (FD) over how the issued 5-year bonds should be accounted for. The FD’s position is that, though the firm has clear intention to pay all interests and principal on the bonds to the bondholders, such treatment would result in a very huge measurement mismatch. Hence, the fair value option should be taken. Taking that option would have created a fair value gain on the bond by GH¢12 million (including a credit-worthiness element of GH¢5 million).
On 30 June 2021, Bediako Ltd made an issue of 30 million new ordinary shares to a venture capital firm to raise GH¢120 million. Later, on 1 November 2021, the entity also made a capitalisation issue on the basis of one new share for every four shares held at that time. Bediako has correctly accounted for these issues in its financial statements. Its total number of ordinary shares outstanding as at 31 December 2021 was 200 million.
Ordinary dividends for the current period, when compared to the draft profit attributable to ordinary shareholders, translate into a dividend cover of 5:1. The following details relate to preference dividends paid by Bediako during the current year:

Class of shares	Type of dividend	GH¢ million
Irredeemable preference shares (non-cumulative)	Final	10
Redeemable preference shares (non-cumulative)	Final	15

Bediako has correctly accounted for these dividends.

A comparable listed firm provides a price/earnings ratio of 12 and dividend yield of 4%. A risk factor of 20% should be assumed.

Required:
Determine a range of values for Alomo’s equity investment in Bediako using the following bases:
i) Net assets basis
ii) Earnings basis
iii) Dividend yield basis

Answer

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Tags: Dividend Yield, Earnings, Equity Investment, Fair Value Measurement, Net Asset Value, Valuation
Level: Level 3

Topic: Business valuations
Series: JULY 2023

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)

Answer

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Tags: Dividend Cover, Dividend growth model, Earnings Yield Method, EPS, Net Asset Value, Price-Earnings ratio
Level: Level 2

Topic: Business valuations
Series: MAY 2017

FM – Nov 2017 – L2 – Q5a – Business valuations

Estimate the value per share of LHW Ltd using different valuation methods including net asset value, P/E ratio, and dividend yield basis.

Question

Paul and Tony Reid are the owners of LHW Ltd., publishers of “Luxury Homes of the World”. As with similar publishers, they are currently experiencing difficult market conditions. Paul wishes to sell his share of the business to Tony to pursue other interests. Paul feels their business has a “long term value” not captured by current market values. Paul and Tony wish to have their business “properly valued” so a “fair” buyout price can be agreed.

LHW Ltd: Balance Sheet as at 31 December 2016

Net profit after tax and interest payments but before dividends was GH¢250,000, and the annual dividend was GH¢100,000 for the year ended December 31, 2016.

Covenants in the debentures require that a change in ownership of LHW would result in the redeeming of its debentures. They must be redeemed at “fair market value” based on the yield on comparable bonds, which is currently 8% p.a. The semi-annual coupon has just been paid with 10 more due before the bond would mature in 2022.

Paul and Tony estimate that 20% of LHW’s debtors are likely to be irrecoverable, but feel that current market conditions will improve and that over the next three years, earnings should increase by 5% per annum.

Independent valuations state that the current realizable values of the company’s fixed assets are:

Fixed Asset	Realisable Value (GH¢ million)
Land and Buildings	2.0
Plant and Machinery	4.0
Fixtures and Fittings	1.2
Motor Vehicles	0.35
Total	7.55

For a firm similar to LHW Ltd with similar growth expectations but which is quoted on the stock exchange, the Price Earnings (P/E) ratio was 14 times, and its gross dividend yield was 10%.

Required:
a) Given the above information, estimate the value per share of LHW Ltd using:
i) The net asset (liquidation) basis
ii) The P/E basis
iii) The dividend yield basis (assume with no growth)
iv) The dividend yield basis (assume with growth) (12 marks)

Answer

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Tags: Business Valuation, Dividend Yield, Net Asset Value, P/E Ratio
Level: Level 2

Topic: Business valuations
Series: NOV 2017

CR – July 2024 – L3 – Q4a – Business Valuation

Determine a range of values for Alomo's equity in Bediako Metals Ltd using three valuation bases: Net assets, Earnings, and Dividend yield.

Question

Question:

Items	GH¢ million
Tangible assets	895
Non-current financial assets	150
Current assets	485
Total liabilities (including all redeemable preference share capital)	750
Irredeemable preference share capital	100
Draft profit after tax	170

Additional information:

At year-end, the entity had to make a downward revision of decommissioning provision relating to one of its plants as both the expected cash outflows and the current-market rate discount rate were reassessed. Reduction of GH¢40 million (appropriately discounted) has been used to revise the liability and same credited to profit or loss.
Bediako holds some 3-year bonds which are measured at fair value through other comprehensive income. Coupon and effective interest rates, which are the same, have been correctly dealt with. The carrying value of these bonds is GH¢92 million, and the bonds are yet to be revised to reflect their year-end fair value. For the purpose of obtaining the appropriate fair value in line with IFRS 13: Fair value measurement, the following information has been obtained:

Reference to most advantageous market	GH¢ million
Quoted market prices	120
Quoted market prices (with minor adjustment)	85
Based on own model	140

The directors of Bediako Ltd have refused to agree with their external auditors to a reduction in the year-end inventory value for the firm’s main product. As a result, the auditors have issued a qualified opinion on the financial statements. The items in question are being included in current assets at the cost of GH¢200 million. The auditors noted during their subsequent event procedures that 90% of these items had been sold for 95% of their cost.
The directors also failed to cooperate with the Finance Director (FD) over how the issued 5-year bonds should be accounted for. The FD’s position is that, though the firm has clear intention to pay all interests and principal on the bonds to the bondholders, such treatment would result in a very huge measurement mismatch. Hence, the fair value option should be taken. Taking that option would have created a fair value gain on the bond by GH¢12 million (including a credit-worthiness element of GH¢5 million).
On 30 June 2021, Bediako Ltd made an issue of 30 million new ordinary shares to a venture capital firm to raise GH¢120 million. Later, on 1 November 2021, the entity also made a capitalisation issue on the basis of one new share for every four shares held at that time. Bediako has correctly accounted for these issues in its financial statements. Its total number of ordinary shares outstanding as at 31 December 2021 was 200 million.
Ordinary dividends for the current period, when compared to the draft profit attributable to ordinary shareholders, translate into a dividend cover of 5:1. The following details relate to preference dividends paid by Bediako during the current year:

Class of shares	Type of dividend	GH¢ million
Irredeemable preference shares (non-cumulative)	Final	10
Redeemable preference shares (non-cumulative)	Final	15

Bediako has correctly accounted for these dividends.

A comparable listed firm provides a price/earnings ratio of 12 and dividend yield of 4%. A risk factor of 20% should be assumed.

Required:
Determine a range of values for Alomo’s equity investment in Bediako using the following bases:
i) Net assets basis
ii) Earnings basis
iii) Dividend yield basis

Answer

Find Related Questions by Tags, levels, etc.

Tags: Dividend Yield, Earnings, Equity Investment, Fair Value Measurement, Net Asset Value, Valuation
Level: Level 3

Topic: Business valuations
Series: JULY 2023

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:

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

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)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Dividend Cover, Dividend growth model, Earnings Yield Method, EPS, Net Asset Value, Price-Earnings ratio
Level: Level 2

Topic: Business valuations
Series: MAY 2017

FM – Nov 2017 – L2 – Q5a – Business valuations

Estimate the value per share of LHW Ltd using different valuation methods including net asset value, P/E ratio, and dividend yield basis.

Question

LHW Ltd: Balance Sheet as at 31 December 2016

Net profit after tax and interest payments but before dividends was GH¢250,000, and the annual dividend was GH¢100,000 for the year ended December 31, 2016.

Independent valuations state that the current realizable values of the company’s fixed assets are:

Fixed Asset	Realisable Value (GH¢ million)
Land and Buildings	2.0
Plant and Machinery	4.0
Fixtures and Fittings	1.2
Motor Vehicles	0.35
Total	7.55

For a firm similar to LHW Ltd with similar growth expectations but which is quoted on the stock exchange, the Price Earnings (P/E) ratio was 14 times, and its gross dividend yield was 10%.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Business Valuation, Dividend Yield, Net Asset Value, P/E Ratio
Level: Level 2

Topic: Business valuations
Series: NOV 2017

Question Tag: Net Asset Value

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CR – July 2024 – L3 – Q4a – Business Valuation

Determine a range of values for Alomo's equity in Bediako Metals Ltd using three valuation bases: Net assets, Earnings, and Dividend yield.

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.

FM – Nov 2017 – L2 – Q5a – Business valuations

Estimate the value per share of LHW Ltd using different valuation methods including net asset value, P/E ratio, and dividend yield basis.

CR – July 2024 – L3 – Q4a – Business Valuation

Determine a range of values for Alomo's equity in Bediako Metals Ltd using three valuation bases: Net assets, Earnings, and Dividend yield.

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.

FM – Nov 2017 – L2 – Q5a – Business valuations

Estimate the value per share of LHW Ltd using different valuation methods including net asset value, P/E ratio, and dividend yield basis.

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CR – July 2024 – L3 – Q4a – Business Valuation

Determine a range of values for Alomo's equity in Bediako Metals Ltd using three valuation bases: Net assets, Earnings, and Dividend yield.

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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.

You're reporting an error for "FM – MAY 2017 – L2 – Q5 – Business valuations"

FM – Nov 2017 – L2 – Q5a – Business valuations

Estimate the value per share of LHW Ltd using different valuation methods including net asset value, P/E ratio, and dividend yield basis.

You're reporting an error for "FM – Nov 2017 – L2 – Q5a – Business valuations"

CR – July 2024 – L3 – Q4a – Business Valuation

Determine a range of values for Alomo's equity in Bediako Metals Ltd using three valuation bases: Net assets, Earnings, and Dividend yield.

You're reporting an error for "CR – July 2024 – L3 – Q4a – Business Valuation"

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.

You're reporting an error for "FM – MAY 2017 – L2 – Q5 – Business valuations"

FM – Nov 2017 – L2 – Q5a – Business valuations

Estimate the value per share of LHW Ltd using different valuation methods including net asset value, P/E ratio, and dividend yield basis.

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