Question Tag: Valuation Techniques

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  • 10 Marks

CR – May 2021 – L3 – Q4b – Fair Value Measurement (IFRS 13)

Explain fair value hierarchy under IFRS 13 and compute valuation for Bakatari Plc’s assets.

Bakatari Plc is a public limited company that is reviewing the fair valuation of its assets in line with the provisions of IFRS on fair value measurement.

The company has assets that are traded in different markets and is uncertain as to which valuation to use. The assets have to be valued at fair value under International Financial Reporting Standards. Bakatari Plc., currently only buys and sells the assets in market ‘C’.

The data relating to the assets are set out below:

Market Market A Market B Market C
Volume of market (units) 12 million 6 million 3 million
Price per unit N19 N16 N22
Cost of entering the market per unit N2 N2 N3
Transaction cost per unit N1 N2 N2

Required:

i. Explain the three-level hierarchy for fair value measurement used in IFRS 13. (6 Marks)

ii. Discuss with relevant computations how Bakatari Plc should value the above assets under IFRS 13. (4 Marks)

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  • 8 Marks

CR – May 2021 – L3 – Q4 – Fair Value Measurement (IFRS 13)

Evaluate fair value relevance versus historical cost and explain valuation techniques under IFRS 13.

a. Fair value is a market-based measurement, not an entity-specific measurement. It focuses on assets and liabilities and on the exit (selling) price. It also takes into account market conditions at the measurement date. In other words, fair value measurement looks at the amount for which the holders of an asset could sell it and the amount which the holder of a liability would have to pay to transfer it.

Required:

i. Discuss the view that fair value is a more relevant measure to use in corporate reporting than historical cost. (4 Marks)

ii. Discuss the valuation techniques in fair value measurement in accordance with IFRS 13. (4 Marks)

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  • 20 Marks

FM – Nov 2020 – L3 – Q2 – Mergers and Acquisitions

Evaluates the acquisition impact of Yekin plc by Peter John plc, focusing on P/E ratio, EPS, market value, and strategic implications of a hostile takeover versus organic growth.

Peter John plc (PJP) is considering a takeover bid for Yekin plc (YP).

PJP’s board of directors has issued the following statement:
“Our superior P/E ratio and synergistic effects of the acquisition will lead to a post-acquisition increase in earnings per share and in the combined market value of the companies.”

Summarized financial data for the companies (N Million):

PJP YP
Sales 480.0 353.0
Profit before tax 63.0 41.0
Tax (18.9) (12.3)
Profit after tax 44.1 28.7
Dividends 20.0 11.0
Non-current assets (net) 284.0 265.0
Current assets 226.4 173.0
Total assets 510.4 438.0

Equity and Liabilities:

PJP YP
Ordinary shares (10 kobo par value) 40.0 30.0
Reserves 211.2 192.0
Medium and long-term borrowing 86.0 114.0
Current liabilities 173.2 102.0
Total 510.4 438.0

Notes:

  1. After-tax savings in cash operating costs of N7,500,000 per year indefinitely are expected as a result of the acquisition.
  2. Initial redundancy costs will be ₦10 million before tax.
  3. PJP’s cost of capital is 12%.
  4. Current share prices: PJP = N29, YP = N18.
  5. The proposed terms of the takeover are payment of 2 PJP shares for every 3 YP shares.

Required:

a. Calculate the current P/E ratios of PJP and YP. (2 Marks)
b. Estimate the expected post-acquisition earnings per share and comment upon the importance of increasing the earnings per share. (4 Marks)
c. Estimate the effect on the combined market value as a result of the takeover using:
i. P/E-based valuation
ii. Cash flow-based valuation
State clearly any assumptions that you make. (5 Marks)
d. Discuss the limitations of your estimates in (c) above. (3 Marks)
e. Evaluate the strategic implications of making a hostile bid for a company compared with an aggressive investment program of organic growth. (6 Marks)

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  • 5 Marks

CR – Nov 2018 – L3 – Q2c – IFRS 13 Fair value measurement

Advise Gonja Ltd on the fair value measurement of its real estate-linked investment portfolio in the financial statements for 31 July 2018.

Gonja Ltd is an investment company that holds a portfolio of securities linked to the real-estate market in Ghana. The following information is available at 31 July 2018 regarding this portfolio:

  • The portfolio cost GH¢13 million 2 years ago.
  • Real-estate prices in Ghana are generally accepted to have dropped by 20-30% in the past 2 years.
  • The portfolio of securities held by Gonja is difficult to value, as there is no active market. However, the company has received an offer of GH¢2.6 million for this portfolio from an investor. It has no intention of accepting this offer, although similar companies have accepted offers from this investor due to financial difficulties.
  • A normal sale in the present climate could be reasonably expected to yield GH¢6 million, based on an analysis of transactions in similar assets.
  • Gonja’s valuation models suggest that the real estate market in Ghana will recover, and it expects that the portfolio will generate GH¢12 million (at present value) over the next three years.

Required:
In accordance with IFRS 13: Fair Value Measurement, advise Gonja Ltd on the amount it should state its investment portfolio in its financial statements to 31 July 2018, assuming it wishes to use fair value as measured.

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  • 10 Marks

CR – May 2021 – L3 – Q4b – Fair Value Measurement (IFRS 13)

Explain fair value hierarchy under IFRS 13 and compute valuation for Bakatari Plc’s assets.

Bakatari Plc is a public limited company that is reviewing the fair valuation of its assets in line with the provisions of IFRS on fair value measurement.

The company has assets that are traded in different markets and is uncertain as to which valuation to use. The assets have to be valued at fair value under International Financial Reporting Standards. Bakatari Plc., currently only buys and sells the assets in market ‘C’.

The data relating to the assets are set out below:

Market Market A Market B Market C
Volume of market (units) 12 million 6 million 3 million
Price per unit N19 N16 N22
Cost of entering the market per unit N2 N2 N3
Transaction cost per unit N1 N2 N2

Required:

i. Explain the three-level hierarchy for fair value measurement used in IFRS 13. (6 Marks)

ii. Discuss with relevant computations how Bakatari Plc should value the above assets under IFRS 13. (4 Marks)

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  • 8 Marks

CR – May 2021 – L3 – Q4 – Fair Value Measurement (IFRS 13)

Evaluate fair value relevance versus historical cost and explain valuation techniques under IFRS 13.

a. Fair value is a market-based measurement, not an entity-specific measurement. It focuses on assets and liabilities and on the exit (selling) price. It also takes into account market conditions at the measurement date. In other words, fair value measurement looks at the amount for which the holders of an asset could sell it and the amount which the holder of a liability would have to pay to transfer it.

Required:

i. Discuss the view that fair value is a more relevant measure to use in corporate reporting than historical cost. (4 Marks)

ii. Discuss the valuation techniques in fair value measurement in accordance with IFRS 13. (4 Marks)

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  • 20 Marks

FM – Nov 2020 – L3 – Q2 – Mergers and Acquisitions

Evaluates the acquisition impact of Yekin plc by Peter John plc, focusing on P/E ratio, EPS, market value, and strategic implications of a hostile takeover versus organic growth.

Peter John plc (PJP) is considering a takeover bid for Yekin plc (YP).

PJP’s board of directors has issued the following statement:
“Our superior P/E ratio and synergistic effects of the acquisition will lead to a post-acquisition increase in earnings per share and in the combined market value of the companies.”

Summarized financial data for the companies (N Million):

PJP YP
Sales 480.0 353.0
Profit before tax 63.0 41.0
Tax (18.9) (12.3)
Profit after tax 44.1 28.7
Dividends 20.0 11.0
Non-current assets (net) 284.0 265.0
Current assets 226.4 173.0
Total assets 510.4 438.0

Equity and Liabilities:

PJP YP
Ordinary shares (10 kobo par value) 40.0 30.0
Reserves 211.2 192.0
Medium and long-term borrowing 86.0 114.0
Current liabilities 173.2 102.0
Total 510.4 438.0

Notes:

  1. After-tax savings in cash operating costs of N7,500,000 per year indefinitely are expected as a result of the acquisition.
  2. Initial redundancy costs will be ₦10 million before tax.
  3. PJP’s cost of capital is 12%.
  4. Current share prices: PJP = N29, YP = N18.
  5. The proposed terms of the takeover are payment of 2 PJP shares for every 3 YP shares.

Required:

a. Calculate the current P/E ratios of PJP and YP. (2 Marks)
b. Estimate the expected post-acquisition earnings per share and comment upon the importance of increasing the earnings per share. (4 Marks)
c. Estimate the effect on the combined market value as a result of the takeover using:
i. P/E-based valuation
ii. Cash flow-based valuation
State clearly any assumptions that you make. (5 Marks)
d. Discuss the limitations of your estimates in (c) above. (3 Marks)
e. Evaluate the strategic implications of making a hostile bid for a company compared with an aggressive investment program of organic growth. (6 Marks)

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  • 5 Marks

CR – Nov 2018 – L3 – Q2c – IFRS 13 Fair value measurement

Advise Gonja Ltd on the fair value measurement of its real estate-linked investment portfolio in the financial statements for 31 July 2018.

Gonja Ltd is an investment company that holds a portfolio of securities linked to the real-estate market in Ghana. The following information is available at 31 July 2018 regarding this portfolio:

  • The portfolio cost GH¢13 million 2 years ago.
  • Real-estate prices in Ghana are generally accepted to have dropped by 20-30% in the past 2 years.
  • The portfolio of securities held by Gonja is difficult to value, as there is no active market. However, the company has received an offer of GH¢2.6 million for this portfolio from an investor. It has no intention of accepting this offer, although similar companies have accepted offers from this investor due to financial difficulties.
  • A normal sale in the present climate could be reasonably expected to yield GH¢6 million, based on an analysis of transactions in similar assets.
  • Gonja’s valuation models suggest that the real estate market in Ghana will recover, and it expects that the portfolio will generate GH¢12 million (at present value) over the next three years.

Required:
In accordance with IFRS 13: Fair Value Measurement, advise Gonja Ltd on the amount it should state its investment portfolio in its financial statements to 31 July 2018, assuming it wishes to use fair value as measured.

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