Question Tag: Price-Earnings ratio

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  • 20 Marks

FM – Nov 2021 – L3 – Q2 – Mergers and Acquisitions

Advise on financial synergies from KP's acquisition of TE and evaluate cash vs. share-for-share offers.

You run a financial consultancy firm and have been approached by a new client for advice on a potential acquisition. Kola Plc (KP) is a large engineering company that was listed on the stock market ten years ago, with the founders retaining a 20% stake in the business. KP initially experienced rapid growth in earnings before tax, but soon after listing, competition intensified, leading to a significant decline in growth, which currently stands at 4%. Concerned about limited future growth opportunities, the board has decided to adopt a market development strategy for growth by acquiring companies in less competitive regions using KP’s significant cash reserves. The board has identified Temidayo Engineering (TE) as a potential acquisition target.

Temidayo Engineering (TE):

TE is a private engineering company established eight years ago, with early accumulated losses that have now turned profitable, achieving an 8% annual growth in earnings before tax. Cash reserves remain low, and capital access has been a constraint on TE’s investment potential. The founders and their families own 70% of the shares, while a venture capitalist holds the remaining 30%.

Acquisition Information:

KP’s board prefers that TE’s founders remain as directors post-acquisition and has sufficient cash reserves to purchase TE outright. A cash offer of ₦13.10 per share is considered likely to encourage TE’s shareholders to approve the acquisition. Alternatively, KP’s board is exploring a share-for-share exchange to preserve cash for future acquisitions and dividends. Recent mergers in the industry have attracted a 25-30% acquisition premium, with TE’s shareholders expecting a premium towards the higher end for a share-for-share offer. KP has asked you to design a share-for-share offer scheme with a 30% premium.

Extracts from the Latest Financial Statements:

Additional Financial Information:

  • KP has ₦0.50 ordinary shares totaling ₦7,500 million, with each share trading at ₦5.28. It is expected that KP’s price-to-earnings (P/E) ratio will increase by 10% if the acquisition proceeds.
  • TE upgraded its main manufacturing facility last year, expecting annual pre-tax cost savings of ₦50 million from the current financial year. TE has ₦0.25 ordinary shares totaling ₦700 million. TE’s P/E ratio is estimated to be 20% higher than KP’s current P/E ratio based on comparable company analysis.
  • KP’s CEO estimates annual pre-tax revenue and cost synergies of ₦304 million post-acquisition, while the finance director anticipates additional pre-tax financial synergies of ₦106 million, though cautiously, following reports that many acquisitions overestimate synergies. The tax rate is 20%.

Required:

a. Discuss possible sources of financial synergy arising from KP’s acquisition of TE. (6 Marks)

b. Advise the directors on a suitable share-for-share exchange offer that meets TE’s shareholders’ criteria and calculate the impact of both cash and share-for-share offers on the post-acquisition wealth of KP’s and TE’s shareholders. (14 Marks)

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  • 15 Marks

CR – Nov 2020 – L3 – Q4a – Business Valuation

Determine share value of Anidaso Ltd using multiple valuation methods including net assets, P/E ratio, dividend yield, and discounted cash flow.

Anidaso Ltd operates in the manufacturing industry in Ghana. The company is in the process of selling some of its shares to the general public to raise funds to expand its operations. Below are the financial statements of the company:

Statement of profit or loss for the year ended 30 September, 2019

GH¢’000
Revenue 122,900
Cost of sales (58,650)
Gross profit 64,250
Selling, general & administration expenses (43,570)
Profit before interest & taxes 20,680
Finance cost (1,680)
Profit before taxation 19,000
Taxation @ 20% (4,750)
Profit after tax 14,250

Statement of changes in equity (extracts) for the year ended 30 September, 2019

GH¢’000
Retained Earnings at October 1, 2018 47,970
Profit for the year 14,250
Dividend paid (6,200)
Retained Earnings at 30 September, 2019 56,020

Statement of Financial Position as at 30 September, 2019

GH¢’000 GH¢’000
Non-current assets
Development expenditure 13,050
Patents 8,200
Property, plant, and equipment 98,750 120,000
Current assets
Inventories 21,700
Trade receivables 12,501
Bank and cash 5,944 40,145
Current liabilities
Trade payables (15,400) 24,745
Net current assets 144,745
Non-current liabilities
10% Debenture loan stock (12,000) 132,745
Equity
Share capital 50,000
Revaluation Surplus 26,725
Retained Earnings 56,020 132,745

Additional relevant information:

  • The share capital of the company is composed of:
    • GH¢000
    • 20% redeemable preference shares 10,000
    • Ordinary shares (issued @GH¢0.20 each) 40,000
    • Total share capital: 50,000
  • A review of the development expenditure indicated that only 50% of it is worthwhile.
  • An independent valuer has placed values on some of the assets of Anidaso Ltd below:
    • Property, plant & equipment: GH¢111,000
    • Inventories: GH¢16,200
    • Trade receivables: GH¢10,000
    • Total value: GH¢137,200
  • Profit forecasts for the next five years of Anidaso Ltd are as follows:
    Year-end 30 September Profit before Tax (GH¢’000) Depreciation Charge (GH¢’000)
    2020 14,900 1,100
    2021 16,000 1,225
    2022 19,250 1,550
    2023 19,800 2,025
    2024 21,550 2,130
  • The patents in the statement of financial position represent a license to produce an improved variety of a product and is expected to generate a pre-tax profit of GH¢10,000 per year for the next five years.
  • Abiola Limited is a competitor company listed on the Ghana Stock Exchange, and data extracted from its recently published financial statements revealed the following details:
    • Market capitalization: GH¢1,000,000
    • Number of ordinary shares: 800,000
    • Earnings per share: GH¢0.20
    • Dividend payout ratio: 80%
  • The cost of capital of Anidaso Ltd is 10%.

Required:
Determine the value to be placed on each share of Anidaso Ltd using the following methods of valuation: i) Net assets
ii) Price-earnings ratio
iii) Dividend yield
iv) Discounted cash flow

 

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  • 15 Marks

CR – Nov 2021 – L3 – Q4a – Business valuations

Determine the value of shares of Aboto Ltd using multiple valuation methods including net assets, price-earnings ratio, dividend yield, and discounted cash flow

Aboto Ltd is a private company in the printing industry. It was established by the Aboto family some twenty years ago with Mrs. Aboto as the Managing Director. The business has grown in size over the years, and the directors are now considering listing the company on the Ghana Stock Exchange. The financial statements of the company for the year 2020 are given below:

Additional Information:

  1. The Share Capital of Aboto Ltd consists of ordinary share capital of no par value issued at GH¢100 per share.
  2. An independent valuer estimated the fair value of the Property, Plant & Equipment at GH¢500,000. Valuation charges of 2% have not been accrued for in the above accounts.
  3. The inventory includes obsolete items worth GH¢5,000 being held despite persistent advice by the auditors to have them written off.
  4. Receivables include an amount of GH¢12,000 resulting from the bankruptcy of a major customer. Aboto Ltd is not likely to realize any amount from this, but the directors have refused to make any provision.
  5. The patents represent a right to sell a special product. This product is expected to generate cash flows of GH¢2,000 per annum indefinitely.
  6. The discounted present value of future cash payments in respect of the debentures is GH¢20,000.
  7. Profits after tax of Aboto Ltd over the past four years were as follows:
    Year Profits (GH¢)
    2019 38,000
    2018 36,000
    2017 32,000
    2016 30,000
  8. A corporate plan prepared by the directors of Aboto Ltd in 2018 included the following positions:
  9. The price-earnings ratio and a dividend yield of quoted companies in the same industry Aboto Ltd operates are 8 and 4%, respectively.
  10. The net assets of Aboto Ltd as at 31 December 2019 were GH¢251,100.
  11. The cost of capital of Aboto Ltd is 20%.
  12. Investing in unlisted securities is about 20% more risky than investing in listed securities.

Required:

Determine the value to be placed on each share of Aboto Ltd using the following methods of valuation:

i) Net assets (4 marks)
ii) Price-earnings ratio (4 marks)
iii) Dividend yield (3 marks)
iv) Discounted cash flow (4 marks)

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  • 15 Marks

CR – May 2016 – L3 – Q4a – Business valuation

Compute the value of ordinary shares using three valuation methods for a company preparing for listing, based on given financial statements and additional information.

In 2015, the shareholders of Depot Ltd decided to sell their equity stake in the company. The company is not listed and the new shareholders plan to prepare the company for listing once the acquisition was completed. The summarized financial statements of Depot Ltd for the year ended 30th June, 2015 are stated below:

Statement of Income for the year ended 30th June, 2015

The following additional information is provided;

  1. The discounted present value of future cash payments in respect of the long term loan is GH¢48,800,000.
  2. The stated capital of Depot Ltd is made up of 25,000,000 ordinary shares of no par value.
  3. Current Assets include inventory of GH¢6,600,000 representing goods received from a major supplier on “not for sale but display only” basis.
  4. The fair value of the tangible non-current assets was GH¢116,000,000.
  5. The profit for the current year includes VAT of 17.5% on turnover of GH¢8,500,000 being invoice amount sold to a customer.
  6. The discount rate of Depot Ltd is 10% per annum.
  7. Warehouse Ltd, a major competitor of Depot Ltd is listed with a P/E ratio of 9 and dividend yield of 5.2.
  8. Profits after tax over the 4 years were as follows;

Required:
Compute the value to be placed on the ordinary shares using three methods of valuation and advise the Directors accordingly.

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  • 3 Marks

CR – Aug 2022 – L3 – Q4a – Business Valuation

This question requires identifying three factors that influence the value of the Price-Earnings (P/E) ratio in business valuation.

When acquiring an unquoted company in a takeover bid, the final price will be agreed by negotiation. However, the crucial role of the price-earnings ratio in arriving at the final price cannot be overemphasized.

Required:
State THREE (3) factors that are likely to influence the value of the price-earnings ratio.

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  • 12 Marks

CR – Nov 2017 – L3 – Q3b – Business Valuation

Estimate the value per share of Agos Limited using net assets, dividend valuation, and P/E ratio methods.

Santader Limited intends to take over Agos Limited. The financial statements of Agos Limited for the year ended 30 June 2016 are as follows:

Here are the tables from Question 3b exactly as they appear in the attachment:

Agos Limited – Income Statement for the year ended 30 June, 2016

Description Amount (GH¢)
Profit before tax 450,000
Tax (125,000)
Profit after tax 325,000

Agos Limited – Statement of Retained Earnings for the year ended 30 June 2016

Description Amount (GH¢)
Balance at beginning 250,000
Profit after tax 325,000
Dividend paid (180,000)
Balance at end 395,000

Additional Information
Turnover, profits before tax, and dividends of Agos Limited over the past 5 years:

Year Ending 30 June Sales (GH¢) Pre-tax Profits (GH¢) Dividend (GH¢)
2012 5,800,000 250,000 65,000
2013 6,900,000 320,000 80,000
2014 7,700,000 330,000 100,000
2015 8,500,000 410,000 120,000
2016 9,800,000 450,000 180,000
  1. The patent represents a license to produce and sell a special product. This product is expected to generate a pre-tax profit of GH¢12,000 per annum in perpetuity.
  2. The discount rate of Agos Limited is 10% per annum.
  3. Nhyira Limited, a major competitor of Agos Limited, is listed on the Stock Exchange and has a P/E ratio of 8 and a dividend yield of 10%.
  4. Nhyira Limited expects a return of 11% of the net assets.

Required:
Estimate the value per share of Agos Limited as at 30 June, 2016 using the following methods:
i) Net Assets
ii) Dividend Valuation
iii) Price/earning ratio

 

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  • 20 Marks

FM – DEC 2023 – L2 – Q2 – Business valuations | Mergers and acquisitions

Business valuation techniques applied to a 70% acquisition using P/E ratio, balance sheet valuation, and discounted cash flow.

a) Panpana Ltd is in advanced negotiation with shareholders of Zanu Ltd to acquire 70% shares in that company. The following financial information is provided for Zanu Ltd:

  • Number of ordinary shares = 20 million
  • Net assets per share = GH¢8
  • Earning per share = GH¢15
  • Price Earnings ratio (P/E) = 10

The Finance Director who performed a due diligence review recommended the following:

  1. Fixed assets included in the net assets were overstated by GH¢6 million
  2. A key customer who owes GH¢4 million has gone bankrupt and debt considered irrecoverable
  3. A provision of GH¢10 million is made for a tax liability
  4. Panpana Ltd cost of capital is 16% and risk premium of 4% is added in the valuation of Zanu Ltd to take care of additional operational risk.
  5. The Finance manager provided a statement showing projected cash inflows for the next 5 years as follows:
Year Cash flow (GH¢ million)
1 125
2 60
3 150
4 200
5 110

Required:
Advise shareholders of Panpana Ltd on how much to pay for 70% of the shares of Zanu Ltd using the following valuation methods:
i) Price Earning (P/E) ratio. (4 marks)
ii) Balance sheet valuation basis. (5 marks)
iii) Cash flow valuation. (5 marks)

b) Explain THREE (3) reasons business valuation is undertaken in the corporate environment. (6 marks)

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  • 15 Marks

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.

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)

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  • 20 Marks

FM – May 2020 – L2 – Q2 – Business valuations | Mergers and acquisitions

Value Staygood Ltd using the Price/Earnings ratio, Gordon growth model, and Discounted cash flow methods for a potential takeover by Restwell Ltd.

Restwell Ltd (Restwell), a hotel and leisure company, is currently considering taking over a smaller private limited liability company, Staygood Ltd (Staygood). The board of Restwell is in the process of making a bid for Staygood but first needs to place a value on the company. Restwell has gathered the following data:

Restwell:

  • Weighted average cost of capital: 12%
  • P/E ratio: 12
  • Shareholders’ required rate of return: 15%

Staygood:

  • Current dividend payment (GH¢): 0.27
  • Past five years’ dividend payments (GH¢): 0.15, 0.17, 0.18, 0.21, 0.23
  • Current EPS: 0.37
  • Number of ordinary shares issued: 5 million

The required rate of return of the shareholders of Staygood is 20% higher than that of Restwell due to the higher level of risk associated with Staygood. Restwell estimates that cash flows at the end of the first year will be GH¢2.5 million and these will grow at an annual rate of 5%. Restwell also expects to raise GH¢5 million in two years’ time by selling off hotels of Staygood that are surplus to its needs.

Required:

Estimate values for Staygood using the following valuation methods:

i) Price/earnings ratio valuation. (6 marks)

ii) Gordon growth model. (8 marks)

iii) Discounted cash flow valuation. (6 marks)

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  • 14 Marks

FM – March 2023 – L2 – Q2a – Mergers and acquisitions

Calculate the combined company's EPS, weighted average P/E ratio, market value per share, total market capitalization, and the premium received by Finkyim Ltd.

Panpana Ltd is operating in the same industry as Finkyim Ltd, but Finkyim Ltd is experiencing leadership crisis leading to poor performance. Panpana Ltd, upon realizing this, is putting up a bid to take over Finkyim Ltd. It has been agreed that Panpana Ltd will pay 0.7 of its own shares for each of the shares in Finkyim Ltd. This acquisition has no economies of scale and operating synergy. The relevant financial data of the two companies are as follows:

Panpana Ltd Finkyim Ltd
Net Sales GH¢503,000 GH¢178,000
Profit After Tax GH¢88,000 GH¢18,000
Number of Shares 18,000 4,500
Price per Share GH¢50 GH¢30
Price-Earnings (P/E) Ratio 10 8

Required:
i) Calculate the Earnings per Share (EPS) for the combined company. (3 marks)
ii) Calculate the Weighted Average P/E ratio for the combined company. (3 marks)
iii) Calculate the Market Value per Share for the combined company. (2 marks)
iv) Calculate the Total Market Capitalization for the combined company. (2 marks)
v) Calculate the Premium received by Finkyim Ltd. (4 marks)

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  • 12 Marks

FM – April 2022 – L2 – Q2 – Business valuations | Mergers and acquisitions

Evaluate the possible prices for Blanco Ltd to offer for Zinko using three valuation methods, discuss the issues Zinko may have with these methods, and outline benefits to Blanco Ltd from the acquisition.

Blanco Ltd is listed on the Ghana Stock Exchange (GSE) and is also included in the Ghana club 500 companies. In its recently published accounts, the directors indicated that as part of their growth strategy, the company is negotiating to take over the business of Zinko Enterprise (Zinko), a start-up business in the industry.

Blanco Ltd has in issue 2,480,000 ordinary shares with each share earning approximately GH¢0.79 to give a Price-Earnings ratio of 8. Shareholders expected rate of return is 18%.

The books of Zinko also show that the company has in issue 1,456,000 ordinary shares. The Company’s earnings have increased significantly in the last 4 years from GH¢300,000 to GH¢455,000. The dividend pay-out ratio has been consistent at 45% as a strategy to pay enough funds to shareholders and generate internal resources for future expansion projects. Shareholders expected rate of return is 20%.

Blanco Ltd has estimated that upon completion of the acquisition, the Zinko line of business would generate annual cashflow of GH¢682,500 in the first year, and after that grow at an annual rate of 5% into perpetuity. The investment required for the acquisition will be GH¢1,230,000. However, the funds for this investment would be raised at a cost of capital of 20%.

Required:
a) Use the following valuation methods to estimate the possible prices that Blanco Ltd can offer for the acquisition of Zinko:
i) Price-Earnings ratio
ii) Dividend growth model
iii) Discounted Cashflow (12 marks)

b) Discuss TWO (2) key issues that Zinko management may have with each of the valuation methods used above. (6 marks)

c) Discuss FOUR (4) possible benefits that will accrue to Blanco Ltd if it acquires Zinko. (2 marks)

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