Question Tag: Valuation

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PSAF – Nov 2024 – L2 – Q2a – Valuation of Legacy Fixed Assets

Valuation and accounting treatment of legacy fixed assets in compliance with IPSAS.

Question

The Ministry of Indigenous Enterprises has been charged to collect legacy fixed assets data and value them in accordance with International Public Sector Accounting Standards (IPSAS). The Fixed Assets Coordinating Unit (FACU) of the Ministry has collected for valuation the following data for your action:

The Ministry owns a four (4) storey Office Administration block. The average cost per floor is GH¢4,741,256.25. The building was constructed on a land size of 20 plots of land owned by the Ministry. Currently, a plot of land in that area costs GH¢2,500,000. The FACU has measured the sizes of the building as follows:

Length: 87.5 meters
Width: 42.65 meters
Reference Price per Square Meter: GH¢4,432

However, a professional body, the Institute of Architects and Engineers, has given the reference price for the cost of such an office building at an estimated price of GH¢87,965,025. The building has not seen any further facelift ever since. However, a fence wall with a gate to enforce security and secure the land has just been completed in the current year at a cost of GH¢8,970,000 with a lifespan of 50 years.

The year of construction of the office building could not be determined, yet an old watchman who had been there for ages remembers that the building was constructed some 42 years ago, a time when his seventh child was born. It is the decision of the Government of Ghana on the adoption of IPSAS not to take advantage of the three-year exemption period but to account for legacy fixed assets by taking 60% of the reference cost of the legacy assets as the deemed cost, with a reduced lifespan of 30 years.

Required:

i) Calculate the cost of the land and buildings with structures to be brought into the books on the adoption of IPSAS and determine the depreciation chargeable in the first year in respect of these assets. ii) Show the extract of Statement of Financial Position of the Ministry of Indigenous
Enterprises as at that date

Answer

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Tags: Depreciation, Financial Statements, Fixed Assets, IPSAS, Public Sector, Valuation
Level: Level 2

FR – Nov 2024 – L2 – Q2c – Intangible Assets and Their Measurement

Determining the correct accounting treatment for various intangible assets in Dolo LTD's financial statements, including licensing, software, and book rights.

Question

Question:

Dolo LTD, a market leader in the pharmaceutical industry, incurred the following expenditures during the financial year ended 31 December 2023:

Expenditure Item	Amount (GH¢’000)	Additional Information
Licence to operate in the pharmaceutical industry (10-year validity from January 2023)	200	Intangible asset
Costs incurred in setting up a website for a new product	20	The website will be developed in 2024
Purchase of 295 personal computers on 1 July 2023 (three-year useful life)	840	Excludes software costs
Windows operating system (for 295 PCs)	530	Perpetual software license
Microsoft Office software (for 295 PCs)	24	Three-year software license
Induction training for new staff	430	Staff training for new hires
Book rights purchased from another entity a few years ago	90	The rights have an indefinite useful life
Independent valuation of book rights as of 31 Dec 2023	240	Valued by an independent expert

Dolo LTD’s policy is to use the revaluation model for intangible assets where a market valuation is available.

Required:
Determine the carrying amount of intangible assets at 31 December 2023, in accordance with IAS 38 – Intangible Assets and IFRS.

Answer

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Tags: Amortization, Capitalization, IAS 38, Intangible Assets, Licensing, Revaluation Model, Software Costs, Valuation
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: Nov 2024

FM – Nov 2016 – L3 – SC – Q5 – Portfolio Management

Assess CAPM's basic assumptions and determine overvalued securities among four companies using CAPM metrics.

Question

a. Capital Asset Pricing Model (CAPM) is an equilibrium model of the trade-off between expected portfolio return and unavoidable risk.
What are the basic assumptions on which this model is based? (6 Marks)

b. Currently, the rate of return on the Federal Government Bond redeemable at par in the year 2018 is 5%. The securities of four companies, Akira Plc., Bombadia Plc., Courage Plc., and Divine Plc., have expected returns of 12%, 9.5%, 10.5%, and 13%, respectively. The average expected return on the market portfolio is 10%, subject to a 6% risk (standard deviation). Other relevant information relating to the four securities of the companies is as stated below:

Company	Standard Deviation	Correlation Coefficient
Akira Plc	0.080	0.975
Bombadia Plc	0.075	0.640
Courage Plc	0.090	0.740
Divine Plc	0.150	0.680

You are required to show which of the companies is/are overvalued. (9 Marks)

Answer

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Tags: Assumptions, CAPM, Market Portfolio, Portfolio analysis, Risk-Return Trade-Off, Valuation
Level: Level 3

Topic: Portfolio Management
Series: NOV 2016

FM – Nov 2016 – L3 – SB – Q2 – Investment Appraisal Techniques

Calculate the value of the convertible loan stock, expected growth rate in equity price, and provide recommendations on whether to hold or sell the security.

Question

Honey Comb Plc has issued 10% convertible loan stock, which is due for redemption in 10 years’ time (i.e., December 31, 2025). The option to convert is open only for another two years. If conversion does not take place by December 31, 2017, the option will lapse. The issue was sold to the public at a price of N920 for N1000 of convertible loan stock. The conversion rate at January 1, 2016 was 250 equity shares for N1000 of stock. Non-convertible loan stock in a similar risk class is presently yielding 12%. The market price of Honey Comb Plc equity shares has been increasing steadily over time, reflecting the performance of the company. The shares currently pay a dividend of N0.30 per share. The current price of the convertible security is N960, and each share is currently valued at N3.00. A holder of the convertible loan stock is considering whether to sell his holdings or continue to hold the stock. Ignore taxation while answering the questions.

Required:
a. What is the value of the security as simple unconvertible loan stock? (5 Marks)

b. What is the expected minimum annual rate of growth in the equity share price that is required to justify the holder of convertible loan stock holding on to the security before the option expires? (12 Marks)

c. What recommendation would you make to the holder of the security and why? (3 Marks)

Answer

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Tags: Convertible Loan Stock, Equity Shares, Financial management, Investment Decision, Valuation
Level: Level 3

Topic: Investment Appraisal Techniques
Series: NOV 2016

FM – May 2017 – L3 – Q3 – Business Valuation Techniques

Compute Free Cash Flow to Equity and value per share using FCFE model.

Question

LA Ltd., a food packaging company, has operated as a private company for the past 10 years. The company has been growing rapidly over the last few years. The Directors are now considering listing the company on the stock market. Preparatory to this, the Directors are interested in determining a fair price per share for the company. Assume today is November 1, 2016.

The following information has been extracted from the most recent audited financial statements of LA Ltd:

Statement of Profit or Loss, October 31, 2016

₦million
Sales Revenue	15,790
Cost of Sales	(13,514)
EBITDA	2,276
Depreciation	(440)
EBIT	1,836
Interest Expense	(330)
Earnings Before Tax	1,506
Tax at 30%	(452)
Profit After Tax	1,054

Statement of Financial Position as at October 31:

Additional Facts

The Directors believe that the Free Cash Flow to Equity (FCFE) model should provide an appropriate valuation for the company’s shares.
An investment banker has provided the following estimates of cost of capital:
- Cost of equity: 15%
- Post-tax cost of debt: 4%
- WACC: 12.5%
The Directors believe that the FCFE will grow by 18% for the next 5 years and by 5% thereafter.
The company currently has 600 million shares in issue.

Required:

a. Calculate the free cash flow available to equity for the year ended October 31, 2016. (7 Marks)

b. Use the Free Cash Flow to Equity model to calculate the current value per share. (5 Marks)

c. What are the key advantages and disadvantages of stock exchange listing? (8 Marks)

Answer

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Tags: FCFE Model, Shareholder Impact, Stock Listing, Valuation
Level: Level 3

Topic: Business Valuation Techniques

FM – Nov 2014 – L3 – SB – Q3 – Mergers and Acquisitions

Appraise Syntax Plc.'s proposed acquisition of Synapse Chemical Company based on forecast profits and provide a recommendation.

Question

Syntax Plc., a fertilizer company, is concerned about fluctuating sales and earnings. This caused the management of the company to consider acquisition of another company in the same line of business.

In order to boost its sales and stabilize its earnings, Syntax Plc.’s management has identified Synapse Chemical Company Plc. as a possible target. Syntax proposed to acquire Synapse for a consideration of N20 million, which was agreed to by both companies.

Synapse’s expected future profits, as projected from its past financial records, are as follows:

Forecast Profits

Year	Revenue (N’m)	Cost of Sales (N’m)	Other Expenses (N’m)	Depreciation (N’m)	Total Expenses (N’m)	Profit Before Tax (N’m)
2015	60	30	15	5	50	10
2016	70	35	15	4	54	16
2017	78	39	15	4	58	20
2018	86	43	15	4	62	24
2019	94	47	15	4	66	28

The following information is relevant:

The forecast profits have been limited to five years.
All sales are for cash.
The net book value of Synapse’s assets of N2 million is intended to be sold for N1 million in 2015. The expected loss from the disposal of these assets has been included in the depreciation for 2015. These assets currently have a tax written down value of N3 million. Capital allowances were claimed as at when due.
Synapse currently has a tax liability of N4.5 million due for payment in 2015.
The interest charges of N1 million of Synapse Plc. have been included in other expenses.
In order to maintain the future earnings forecast of Synapse Chemical Company, Syntax Plc. needs to invest in capital expenditure.

7. Company income tax is currently at 30 percent, and the tax delay is one year.

8. The after-tax weighted average cost of capital has been calculated at 22%.

The management of Syntax Plc. has asked you, as a Financial Expert, to appraise the intended acquisition of Synapse Chemical Company Plc. and advise on the reasonableness of the acquisition. Your advice should be in the form of a report to the Board of Directors of Syntax Plc.

Answer

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Tags: Acquisition Appraisal, Discounted Cash Flow, Investment Analysis, Profit Forecast, Valuation
Level: Level 3

Topic: Mergers and acquisitions
Series: NOV 2014

AAA – Nov 2012 – L3 – AII – Q9 – Audit of Accounting Estimates and Fair Value Measurements (IAS 36, IFRS 13)

Identifies the valuation methods for non-monetary government grants under IAS 20.

Question

IAS 20 deals with Accounting for Government Grants and Disclosure of Government Assistance. In the Standard, a grant in the form of a non-monetary asset may be valued at …………… or …………… value.

Answer

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Tags: Financial Reporting, Government Grants, IAS 20, Non-Monetary Assets, Valuation
Level: Level 3

Topic: Audit of Accounting Estimates and Fair Value Measurements (IAS 36, IFRS 13)
Series: NOV 2012

FM – Nov 2023 – L1 – SC – Q5 – Business Valuation Techniques

Calculate convertible bonds' value as debt, assess market expectations, and analyze conversion inducements and dividend policy effects on convertible bonds.

Question

Ope plc has N10m 5 percent convertible bonds in issue. The option to convert into 40 N1 ordinary shares is open only for one more year; they must be either converted in one year’s time or left as ordinary bonds until nine years’ time when they will be redeemed at par. The current share price is ₦1.60, and the annual growth rate in share price is 15 percent per annum. The current required return on Ope’s equity is 25 percent, as its business is relatively risky.

The current yield on ordinary non-convertible bonds in similar companies is 11 percent. These interest rates are expected to remain constant.

Ife plc has 100,000 warrants outstanding, each entitling the holder to subscribe for one N1 ordinary share at 90 kobo anytime during the next 3 years. The current share price is 57 kobo, and capital growth is expected to be constant at 12 percent per annum in the future. The current price of the warrant is 10 kobo.

Required:

a. Calculate the current value of Ope’s convertibles as straight debt, i.e., ignoring the option to convert, and the value if conversion were to take place today. Would you expect the market value of the convertible to be above or below each of these amounts, and why? (5 Marks)

b. By how much should the share price of Ope Plc rise before holders would be induced to convert on the last possible date for conversion? (4 Marks)

c. Explain why the market value of a convertible bond is likely to be affected by the dividend policy of the issuing company. (4 Marks)

d. Based on the projected capital growth for Ife Plc, would you expect holders of
the warrants to exercise them before expiry? What is the minimum annual
growth -rate of the share price necessary to induce holders to exercise their
warrants?
(2 Marks)

Answer

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Tags: Convertible Bonds, Convertible Securities, Debt and Equity, Market Value, Valuation, Warrants
Level: Level 3

Topic: Business Valuation Techniques
Series: NOV 2023

FM – Nov 2023 – L1 – SA – Q1 – Mergers and Acquisitions

Evaluate Finkex Plc's acquisition strategy of Toba Plc, focusing on share-for-share impact, valuation methods, and shareholder implications.

Question

Finkex Plc (FP) is a listed company that operates in the pharmaceutical sector, manufacturing a broad range of drugs under license in a number of countries along the ECOWAS sub-region. For a number of years, the company has grown organically.

Three years ago, the company acquired 20% of the issued share capital of Toba Plc (TP) for N110 million, as a route to both expansion and diversification. The acquisition was by private negotiation in exchange for an issue of its own shares.

Toba Plc is involved in a different area of the pharmaceutical sector from FP as it is primarily a research-driven company involved in the development of new drugs.

To expedite the realization of its diversification strategy, the directors of FP have now decided to acquire the remaining 80% of Toba’s share capital.

Extracts from the financial statements of Finkex Plc are given below:

Finkex Plc – Extracts from financial statements for the last two years

Year	2023	2022
N’m	N’m
Non-current assets (including investment in Toba plc)	602.8	499.4
Current assets	265.0	180.4
Total Assets	867.8	679.8
Current liabilities	199.2	136.8
Total assets less current liabilities	668.6	543.0
Non-current liabilities	149.5	159.4
Net assets	519.1	383.6
Issued share capital (ordinary shares of ₦1 each)	100.0	73.6
Share premium	84.0	12.4
Profit or loss account	335.1	297.6
Total Equity	519.1	383.6
Sales revenue	1320.6	496.0
Earnings after tax	51.50	37.60
Dividend	14.0	14.0
Retained profits	37.5	23.6

All that is known about Toba Plc is that it has 114 million shares in issue; total share capital and reserves are N684 million; earnings after tax in the most recent year were ₦85.2 million on sales of N1,252.0 million, which were double those of the previous year; and that it has an investment valued at N80 million (book and market) in a type of enterprise which might not be of interest to Finkex Plc.

The current stock market prices per share are: Finkex Plc 300k; Toba plc 341k. Both companies pay tax at 50%.

Required:

a. At the above market prices, how many shares of Finkex Plc would have to be issued to buy the rest of Toba Plc on a share-for-share offer? (4 Marks)

b. With regard to earnings and also the book value of assets per share, how would the above share-for-share offer affect the position of:

i. Existing shareholders in Finkex Plc; (6 Marks)

ii. The 80% shareholders in Toba Plc whose shares were to be acquired? (4 Marks)

c. Assuming that the 80% shareholders in Toba Plc were prepared to accept ₦80 million 10% Loan Stock as part of the consideration:

i. What advantages might there be for Finkex Plc in this arrangement? (2 Marks)

ii. What total price could Finkex Plc afford to pay without diluting the earnings per share of its existing shareholders, as calculated in (b) (i) above? (6 Marks)

d. If the board of Toba Plc decided to advise its shareholders not to accept an offer from Finkex Plc, what arguments might they use – including any derived from the financial information available about Finkex Plc?

(8 Marks)

Answer

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Tags: Earnings Per Share, Financial strategy, Loan Stock, Mergers and Acquisitions, Pharmaceutical Sector, Share-for-Share Offer, Shareholder Considerations, Valuation
Level: Level 3

Topic: Mergers and acquisitions
Series: NOV 2023

CR – Nov 2018 – L3 – SB – Q3 – Business Combinations (IFRS 3)

Evaluation of Abana and Doha as potential acquisition targets using adjusted financial ratios.

Question

Banny Plc. (Banny) is a diversified company that has achieved its present size through vertical and horizontal acquisition. The directors have identified two potential target entities for acquisition. The first is Abana Limited (Abana), which operates a cement business near Offa, Kwara State. The second is Doha Limited (Doha), also in the cement industry, located near Oturukpo, Benue State. Banny has obtained copies of their audited financial statements, along with additional information notes.

Statement of Profit or Loss for the Year Ended December 31, 2017

Item	Abana (₦’m)	Doha (₦’m)
Revenue	136,000	132,000
Cost of sales	(84,000)	(91,900)
Gross profit	52,000	40,100
Other operating expenses	(36,000)	(28,000)
Profit from operations	16,000	12,100
Finance costs	(6,000)	(8,000)
Profit before tax	10,000	4,100
Income tax expense	(3,000)	(2,000)
Net profit for the period	7,000	2,100

Statement of changes in equity for the year ended December 31, 2017

Statement of financial position as at December 31, 2017

Additional Notes:

Doha revalued its non-current assets for the first time following IFRS adoption on January 1, 2017. Abana maintains its non-current assets at historical cost.
Banny uses the following ratios to evaluate acquisition targets: Return on Capital Employed (ROCE), Gross Profit Margin, Turnover on Capital Employed, and Leverage.

Required:

a. Compute adjustments for the revaluation of property, plant, and equipment, making Abana and Doha comparable for analysis. (14 Marks)

b. Calculate the four ratios (ROCE, Gross Profit Margin, Turnover on Capital Employed, and Leverage) after adjustments. (4 Marks)

c. Advise Banny on the better acquisition target based on adjusted ratios. (2 Marks)

Answer

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Tags: Acquisition, Financial Ratios, Leverage, Profit margin, ROCE, Valuation
Level: Level 3

Topic: Business Combinations (IFRS 3)

PSAF – Nov 2024 – L2 – Q2a – Valuation of Legacy Fixed Assets

Valuation and accounting treatment of legacy fixed assets in compliance with IPSAS.

Question

Length: 87.5 meters
Width: 42.65 meters
Reference Price per Square Meter: GH¢4,432

Required:

Answer

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Tags: Depreciation, Financial Statements, Fixed Assets, IPSAS, Public Sector, Valuation
Level: Level 2

FR – Nov 2024 – L2 – Q2c – Intangible Assets and Their Measurement

Determining the correct accounting treatment for various intangible assets in Dolo LTD's financial statements, including licensing, software, and book rights.

Question

Question:

Dolo LTD, a market leader in the pharmaceutical industry, incurred the following expenditures during the financial year ended 31 December 2023:

Expenditure Item	Amount (GH¢’000)	Additional Information
Licence to operate in the pharmaceutical industry (10-year validity from January 2023)	200	Intangible asset
Costs incurred in setting up a website for a new product	20	The website will be developed in 2024
Purchase of 295 personal computers on 1 July 2023 (three-year useful life)	840	Excludes software costs
Windows operating system (for 295 PCs)	530	Perpetual software license
Microsoft Office software (for 295 PCs)	24	Three-year software license
Induction training for new staff	430	Staff training for new hires
Book rights purchased from another entity a few years ago	90	The rights have an indefinite useful life
Independent valuation of book rights as of 31 Dec 2023	240	Valued by an independent expert

Dolo LTD’s policy is to use the revaluation model for intangible assets where a market valuation is available.

Required:
Determine the carrying amount of intangible assets at 31 December 2023, in accordance with IAS 38 – Intangible Assets and IFRS.

Answer

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Tags: Amortization, Capitalization, IAS 38, Intangible Assets, Licensing, Revaluation Model, Software Costs, Valuation
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: Nov 2024

FM – Nov 2016 – L3 – SC – Q5 – Portfolio Management

Assess CAPM's basic assumptions and determine overvalued securities among four companies using CAPM metrics.

Question

Company	Standard Deviation	Correlation Coefficient
Akira Plc	0.080	0.975
Bombadia Plc	0.075	0.640
Courage Plc	0.090	0.740
Divine Plc	0.150	0.680

You are required to show which of the companies is/are overvalued. (9 Marks)

Answer

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Tags: Assumptions, CAPM, Market Portfolio, Portfolio analysis, Risk-Return Trade-Off, Valuation
Level: Level 3

Topic: Portfolio Management
Series: NOV 2016

FM – Nov 2016 – L3 – SB – Q2 – Investment Appraisal Techniques

Calculate the value of the convertible loan stock, expected growth rate in equity price, and provide recommendations on whether to hold or sell the security.

Question

Required:
a. What is the value of the security as simple unconvertible loan stock? (5 Marks)

c. What recommendation would you make to the holder of the security and why? (3 Marks)

Answer

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Tags: Convertible Loan Stock, Equity Shares, Financial management, Investment Decision, Valuation
Level: Level 3

Topic: Investment Appraisal Techniques
Series: NOV 2016

FM – May 2017 – L3 – Q3 – Business Valuation Techniques

Compute Free Cash Flow to Equity and value per share using FCFE model.

Question

The following information has been extracted from the most recent audited financial statements of LA Ltd:

Statement of Profit or Loss, October 31, 2016

₦million
Sales Revenue	15,790
Cost of Sales	(13,514)
EBITDA	2,276
Depreciation	(440)
EBIT	1,836
Interest Expense	(330)
Earnings Before Tax	1,506
Tax at 30%	(452)
Profit After Tax	1,054

Statement of Financial Position as at October 31:

Additional Facts

The Directors believe that the Free Cash Flow to Equity (FCFE) model should provide an appropriate valuation for the company’s shares.
An investment banker has provided the following estimates of cost of capital:
- Cost of equity: 15%
- Post-tax cost of debt: 4%
- WACC: 12.5%
The Directors believe that the FCFE will grow by 18% for the next 5 years and by 5% thereafter.
The company currently has 600 million shares in issue.

Required:

a. Calculate the free cash flow available to equity for the year ended October 31, 2016. (7 Marks)

b. Use the Free Cash Flow to Equity model to calculate the current value per share. (5 Marks)

c. What are the key advantages and disadvantages of stock exchange listing? (8 Marks)

Answer

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Tags: FCFE Model, Shareholder Impact, Stock Listing, Valuation
Level: Level 3

Topic: Business Valuation Techniques

FM – Nov 2014 – L3 – SB – Q3 – Mergers and Acquisitions

Appraise Syntax Plc.'s proposed acquisition of Synapse Chemical Company based on forecast profits and provide a recommendation.

Question

Synapse’s expected future profits, as projected from its past financial records, are as follows:

Forecast Profits

Year	Revenue (N’m)	Cost of Sales (N’m)	Other Expenses (N’m)	Depreciation (N’m)	Total Expenses (N’m)	Profit Before Tax (N’m)
2015	60	30	15	5	50	10
2016	70	35	15	4	54	16
2017	78	39	15	4	58	20
2018	86	43	15	4	62	24
2019	94	47	15	4	66	28

The following information is relevant:

The forecast profits have been limited to five years.
All sales are for cash.
The net book value of Synapse’s assets of N2 million is intended to be sold for N1 million in 2015. The expected loss from the disposal of these assets has been included in the depreciation for 2015. These assets currently have a tax written down value of N3 million. Capital allowances were claimed as at when due.
Synapse currently has a tax liability of N4.5 million due for payment in 2015.
The interest charges of N1 million of Synapse Plc. have been included in other expenses.
In order to maintain the future earnings forecast of Synapse Chemical Company, Syntax Plc. needs to invest in capital expenditure.

7. Company income tax is currently at 30 percent, and the tax delay is one year.

8. The after-tax weighted average cost of capital has been calculated at 22%.

Answer

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Tags: Acquisition Appraisal, Discounted Cash Flow, Investment Analysis, Profit Forecast, Valuation
Level: Level 3

Topic: Mergers and acquisitions
Series: NOV 2014

AAA – Nov 2012 – L3 – AII – Q9 – Audit of Accounting Estimates and Fair Value Measurements (IAS 36, IFRS 13)

Identifies the valuation methods for non-monetary government grants under IAS 20.

Question

Answer

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Tags: Financial Reporting, Government Grants, IAS 20, Non-Monetary Assets, Valuation
Level: Level 3

Topic: Audit of Accounting Estimates and Fair Value Measurements (IAS 36, IFRS 13)
Series: NOV 2012

FM – Nov 2023 – L1 – SC – Q5 – Business Valuation Techniques

Calculate convertible bonds' value as debt, assess market expectations, and analyze conversion inducements and dividend policy effects on convertible bonds.

Question

The current yield on ordinary non-convertible bonds in similar companies is 11 percent. These interest rates are expected to remain constant.

Required:

b. By how much should the share price of Ope Plc rise before holders would be induced to convert on the last possible date for conversion? (4 Marks)

c. Explain why the market value of a convertible bond is likely to be affected by the dividend policy of the issuing company. (4 Marks)

Answer

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Tags: Convertible Bonds, Convertible Securities, Debt and Equity, Market Value, Valuation, Warrants
Level: Level 3

Topic: Business Valuation Techniques
Series: NOV 2023

FM – Nov 2023 – L1 – SA – Q1 – Mergers and Acquisitions

Evaluate Finkex Plc's acquisition strategy of Toba Plc, focusing on share-for-share impact, valuation methods, and shareholder implications.

Question

Toba Plc is involved in a different area of the pharmaceutical sector from FP as it is primarily a research-driven company involved in the development of new drugs.

To expedite the realization of its diversification strategy, the directors of FP have now decided to acquire the remaining 80% of Toba’s share capital.

Extracts from the financial statements of Finkex Plc are given below:

Finkex Plc – Extracts from financial statements for the last two years

Year	2023	2022
N’m	N’m
Non-current assets (including investment in Toba plc)	602.8	499.4
Current assets	265.0	180.4
Total Assets	867.8	679.8
Current liabilities	199.2	136.8
Total assets less current liabilities	668.6	543.0
Non-current liabilities	149.5	159.4
Net assets	519.1	383.6
Issued share capital (ordinary shares of ₦1 each)	100.0	73.6
Share premium	84.0	12.4
Profit or loss account	335.1	297.6
Total Equity	519.1	383.6
Sales revenue	1320.6	496.0
Earnings after tax	51.50	37.60
Dividend	14.0	14.0
Retained profits	37.5	23.6

The current stock market prices per share are: Finkex Plc 300k; Toba plc 341k. Both companies pay tax at 50%.

Required:

a. At the above market prices, how many shares of Finkex Plc would have to be issued to buy the rest of Toba Plc on a share-for-share offer? (4 Marks)

b. With regard to earnings and also the book value of assets per share, how would the above share-for-share offer affect the position of:

i. Existing shareholders in Finkex Plc; (6 Marks)

ii. The 80% shareholders in Toba Plc whose shares were to be acquired? (4 Marks)

c. Assuming that the 80% shareholders in Toba Plc were prepared to accept ₦80 million 10% Loan Stock as part of the consideration:

i. What advantages might there be for Finkex Plc in this arrangement? (2 Marks)

ii. What total price could Finkex Plc afford to pay without diluting the earnings per share of its existing shareholders, as calculated in (b) (i) above? (6 Marks)

(8 Marks)

Answer

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Tags: Earnings Per Share, Financial strategy, Loan Stock, Mergers and Acquisitions, Pharmaceutical Sector, Share-for-Share Offer, Shareholder Considerations, Valuation
Level: Level 3

Topic: Mergers and acquisitions
Series: NOV 2023

CR – Nov 2018 – L3 – SB – Q3 – Business Combinations (IFRS 3)

Evaluation of Abana and Doha as potential acquisition targets using adjusted financial ratios.

Question

Statement of Profit or Loss for the Year Ended December 31, 2017

Item	Abana (₦’m)	Doha (₦’m)
Revenue	136,000	132,000
Cost of sales	(84,000)	(91,900)
Gross profit	52,000	40,100
Other operating expenses	(36,000)	(28,000)
Profit from operations	16,000	12,100
Finance costs	(6,000)	(8,000)
Profit before tax	10,000	4,100
Income tax expense	(3,000)	(2,000)
Net profit for the period	7,000	2,100

Statement of changes in equity for the year ended December 31, 2017

Statement of financial position as at December 31, 2017

Additional Notes:

Doha revalued its non-current assets for the first time following IFRS adoption on January 1, 2017. Abana maintains its non-current assets at historical cost.
Banny uses the following ratios to evaluate acquisition targets: Return on Capital Employed (ROCE), Gross Profit Margin, Turnover on Capital Employed, and Leverage.

Required:

a. Compute adjustments for the revaluation of property, plant, and equipment, making Abana and Doha comparable for analysis. (14 Marks)

b. Calculate the four ratios (ROCE, Gross Profit Margin, Turnover on Capital Employed, and Leverage) after adjustments. (4 Marks)

c. Advise Banny on the better acquisition target based on adjusted ratios. (2 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Acquisition, Financial Ratios, Leverage, Profit margin, ROCE, Valuation
Level: Level 3

Topic: Business Combinations (IFRS 3)

Question Tag: Valuation

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