Price/Earnings – NBC Institute

CR – Aug 2022 – L3 – Q4b – Business Valuation

This question requires computing the valuation of Tinto Ltd using three different methods: the net assets method, the price-earnings ratio method, and the dividend growth method.

Question

Tinto Ltd produces handicrafts for both local and foreign markets. The company was incorporated several years ago. The shareholders of Tinto Ltd would now like to realize their investment. In order to arrive at an estimate of what they believe the business is worth, they have identified a long-established quoted company, Dingo Ltd, which has a similar business but produces for the European market only.

Summarized financial statistics for the two companies for the most recent financial year are as follows:

	Tinto Ltd	Dingo Ltd
Issued shares (million)	8	20
Net assets value (GH¢ ’million)	14.4	30
Earnings per share (GH¢)	0.35	0.28
Dividend per share (GH¢)	0.20	0.24
Debt: Equity ratio	1:7	1:6.5
Share price (as quoted on the stock market) – GH¢	–	1.60
Expected rate of growth in earnings/dividends	5%	5%

Additional Information:

The net assets of Tinto Ltd are the net book values of tangible non-current assets, including working capital. However:
- A recent valuation of the buildings was GH¢1,500,000 above book value.
- An investment held, which is designated as Equity Financial Asset at Fair Value through Profit or Loss with a carrying value of GH¢1,000,000, is fair valued at GH¢1,100,000.
- Due to a dispute with one of their clients, an additional allowance for bad debts of GH¢750,000 could prudently be made.
- An item of plant with a carrying value of GH¢800,000 is assessed to have a value-in-use of GH¢760,000 and fair value less cost to sell of GH¢780,000.
Growth rate should be assumed to be constant per annum. Tinto Ltd’s earnings growth rate estimate was provided by the marketing manager, based on expected growth in sales adjusted by normal profit margins. Dingo Ltd’s growth rates are gleaned from press reports.
The dividend yield of Dingo Ltd approximates its cost of equity.

Required:

Compute a range of valuations for the business of Tinto Ltd, using the information available and stating any assumptions made. Use the following methods for the valuation:

i) Net assets method (5 marks)
ii) Price-earnings method (3 marks)
iii) Dividend growth method (4 marks)

(Note: Ignore tax implications.)

Answer

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Tags: Business Valuation, Dividend Growth, Net Assets, Price/Earnings
Level: Level 3

Topic: Business valuations
Series: AUG 2022

CR – Dec 2022 – L3 – Q4a – Business Valuation

Valuation of Kudus Ltd using Net Asset, Price/Earnings, and Dividend Yield methods for acquisition purposes.

Question

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:

Description	GH¢ million
Non-current assets	150
Current assets	145
Ordinary shares (@ GH¢1.5)	30
20% Preference shares	10
Non-current liabilities	50
Current liabilities	110
Profit after tax (Draft)	38

Number of authorised ordinary shares: 30 million

Additional information:

Kudus has the following ordinary dividends:

Description	GH¢ million
Announced on 15 March 2021 but declared on 10 April 2021	2.5
Declared on 30 June 2021 but paid on 31 July 2021	1.5
Announced on 25 March 2022 but declared on 5 April 2022	2

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

The preference shares are irredeemable.
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.
The following details relate to Bukari Plc, a listed firm which operates in the same sector as Kudus:

Indicators	Ratio
Dividend cover	4
Yield on earnings	12.5%
Annual sales growth (over last 5 years)	18%
Annual earnings growth (over last 5 years)	17%

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)

Answer

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Tags: Acquisition, Dividend Yield, Kudus Ltd, Net Asset Basis, Price/Earnings, Valuation
Level: Level 3

Topic: Business valuations
Series: DEC 2022

CR – Aug 2022 – L3 – Q4b – Business Valuation

This question requires computing the valuation of Tinto Ltd using three different methods: the net assets method, the price-earnings ratio method, and the dividend growth method.

Question

Summarized financial statistics for the two companies for the most recent financial year are as follows:

	Tinto Ltd	Dingo Ltd
Issued shares (million)	8	20
Net assets value (GH¢ ’million)	14.4	30
Earnings per share (GH¢)	0.35	0.28
Dividend per share (GH¢)	0.20	0.24
Debt: Equity ratio	1:7	1:6.5
Share price (as quoted on the stock market) – GH¢	–	1.60
Expected rate of growth in earnings/dividends	5%	5%

Additional Information:

The net assets of Tinto Ltd are the net book values of tangible non-current assets, including working capital. However:
- A recent valuation of the buildings was GH¢1,500,000 above book value.
- An investment held, which is designated as Equity Financial Asset at Fair Value through Profit or Loss with a carrying value of GH¢1,000,000, is fair valued at GH¢1,100,000.
- Due to a dispute with one of their clients, an additional allowance for bad debts of GH¢750,000 could prudently be made.
- An item of plant with a carrying value of GH¢800,000 is assessed to have a value-in-use of GH¢760,000 and fair value less cost to sell of GH¢780,000.
Growth rate should be assumed to be constant per annum. Tinto Ltd’s earnings growth rate estimate was provided by the marketing manager, based on expected growth in sales adjusted by normal profit margins. Dingo Ltd’s growth rates are gleaned from press reports.
The dividend yield of Dingo Ltd approximates its cost of equity.

Required:

Compute a range of valuations for the business of Tinto Ltd, using the information available and stating any assumptions made. Use the following methods for the valuation:

i) Net assets method (5 marks)
ii) Price-earnings method (3 marks)
iii) Dividend growth method (4 marks)

(Note: Ignore tax implications.)

Answer

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Tags: Business Valuation, Dividend Growth, Net Assets, Price/Earnings
Level: Level 3

Topic: Business valuations
Series: AUG 2022

CR – Dec 2022 – L3 – Q4a – Business Valuation

Valuation of Kudus Ltd using Net Asset, Price/Earnings, and Dividend Yield methods for acquisition purposes.

Question

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

Description	GH¢ million
Non-current assets	150
Current assets	145
Ordinary shares (@ GH¢1.5)	30
20% Preference shares	10
Non-current liabilities	50
Current liabilities	110
Profit after tax (Draft)	38

Number of authorised ordinary shares: 30 million

Additional information:

Kudus has the following ordinary dividends:

Description	GH¢ million
Announced on 15 March 2021 but declared on 10 April 2021	2.5
Declared on 30 June 2021 but paid on 31 July 2021	1.5
Announced on 25 March 2022 but declared on 5 April 2022	2

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

The preference shares are irredeemable.
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.
The following details relate to Bukari Plc, a listed firm which operates in the same sector as Kudus:

Indicators	Ratio
Dividend cover	4
Yield on earnings	12.5%
Annual sales growth (over last 5 years)	18%
Annual earnings growth (over last 5 years)	17%

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)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Acquisition, Dividend Yield, Kudus Ltd, Net Asset Basis, Price/Earnings, Valuation
Level: Level 3

Topic: Business valuations
Series: DEC 2022

Question Tag: Price/Earnings

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CR – Aug 2022 – L3 – Q4b – Business Valuation

This question requires computing the valuation of Tinto Ltd using three different methods: the net assets method, the price-earnings ratio method, and the dividend growth method.

CR – Dec 2022 – L3 – Q4a – Business Valuation

Valuation of Kudus Ltd using Net Asset, Price/Earnings, and Dividend Yield methods for acquisition purposes.

CR – Aug 2022 – L3 – Q4b – Business Valuation

This question requires computing the valuation of Tinto Ltd using three different methods: the net assets method, the price-earnings ratio method, and the dividend growth method.

CR – Dec 2022 – L3 – Q4a – Business Valuation

Valuation of Kudus Ltd using Net Asset, Price/Earnings, and Dividend Yield methods for acquisition purposes.

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CR – Aug 2022 – L3 – Q4b – Business Valuation

This question requires computing the valuation of Tinto Ltd using three different methods: the net assets method, the price-earnings ratio method, and the dividend growth method.

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CR – Dec 2022 – L3 – Q4a – Business Valuation

Valuation of Kudus Ltd using Net Asset, Price/Earnings, and Dividend Yield methods for acquisition purposes.

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CR – Aug 2022 – L3 – Q4b – Business Valuation

This question requires computing the valuation of Tinto Ltd using three different methods: the net assets method, the price-earnings ratio method, and the dividend growth method.

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CR – Dec 2022 – L3 – Q4a – Business Valuation

Valuation of Kudus Ltd using Net Asset, Price/Earnings, and Dividend Yield methods for acquisition purposes.

You're reporting an error for "CR – Dec 2022 – L3 – Q4a – Business Valuation"

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