- 20 Marks
FM – May 2023 – L3 – Q2 – Business Valuation Techniques
Analyze AHP’s intrinsic value using fundamental and technical analysis, apply the dividend valuation model, and evaluate EMH implications.
Question
You are a Financial Analyst at Tayo Research Group (TRG). You begin valuing Aba Hotels Plc (AHP), a thinly and infrequently traded stock currently selling at 217 kobo, cum 2021 dividend.
For estimating AHP’s required return on equity, TRG uses the capital asset pricing model (CAPM) approach, but you think its equity beta of 1.20 is not reliable because of the stock’s extremely thin trading volume. You have therefore obtained the beta and other pertinent data for Eko Hotel Plc (EHP) – (See Table 1), a midsized company in the same industry with high liquidity trading on the Nigerian Stock Exchange.
Table 1: Valuation Data for EHP
| Parameter | Value |
|---|---|
| Asset beta | 0.763 |
| Debt beta | 0.150 |
| Debt ratio (D/D+E) | 0.60 |
| Effective tax rate (%) | 30% |
Summarised financial data for AHP is shown below:
Statement of Profit or Loss Account
| Year | 2019 | 2020 | 2021* |
|---|---|---|---|
| Sales (₦’000) | 305,500 | 357,600 | 409,200 |
| Taxable income (₦’000) | 40,500 | 49,000 | 56,700 |
| Taxation (₦’000) | (14,175) | (17,150) | (19,845) |
| Post-tax income (₦’000) | 26,325 | 31,850 | 36,855 |
| Dividend (₦’000) | (9,340) | (10,228) | (11,200) |
| Retained earnings (₦’000) | 16,985 | 21,622 | 25,655 |
Statement of Financial Position
| Year | 2021* |
|---|---|
| Non-current assets (₦’000) | 216,800 |
| Current assets (₦’000) | 158,000 |
| Current liabilities (₦’000) | (104,800) |
| Net assets (₦’000) | 270,000 |
| Ordinary shares (₦0.50 par value) | 80,000 |
| Reserves (₦’000) | 130,000 |
| 15% Bond 2026 (₦100 par value) | 60,000 |
(*2021 figures are unaudited)
Other Relevant Information:
- It has been estimated that the debt/equity ratio of AHP is 0.16 and the beta of its debt is 0.2.
- The risk-free rate is 12% and the market risk premium is 5%.
- AHP has an effective tax rate of 35%.
- As a result of recent capital investment, stock market analysts expect post-tax earnings and dividends to increase by 25% for two years and then revert to the company’s existing growth rates.
Required:
a. Stock market analysts sometimes use fundamental analysis and sometimes technical analysis to forecast future share prices.
What are fundamental analysis and technical analysis? (4 Marks)
b. Using the dividend valuation model, estimate what a fundamental analyst might consider to be the intrinsic (or realistic) value of the company’s shares.
Comment upon the significance of your estimate for the fundamental analyst. (12 Marks)
c. Explain whether your answer to (b) above is consistent with the semi-strong and strong forms of the efficient markets hypothesis (EMH), and comment upon whether financial analysts serve any useful purpose in an efficient market. (4 Marks)
Find Related Questions by Tags, levels, etc.
- Tags: CAPM, Dividend valuation, Efficient Markets, Fundamental Analysis, Technical Analysis
- Level: Level 3