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- 15 Marks
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)
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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
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- 30 Marks
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)
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- 20 Marks
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)
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- 15 Marks
FM – Nov 2022 – L3 – Q5 – Business Valuation Techniques
Calculate the equity value of APL using SVA and outline three methods for funding the MBO.
Question
Aderupoko Plc (ADP), a large listed media group, has been the holding company of Adamu Publishers Limited (APL) since 2015. The publishing company (APL) is 100% owned by ADP since inception.
Recently, the directors of APL informed ADP’s board of their readiness to make a management buy-out (MBO) of APL. Accordingly, ADP’s board decided to value APL using the shareholder value analysis method (SVA). ADP’s board estimates that APL has a four-year competitive advantage over its competitors (to 30 September 2024) and the following data regarding APL’s value drivers and additional financial information has been collected:
| Year to 30 September | 2021 | 2022 | 2023 | 2024 | 2025+ |
|---|---|---|---|---|---|
| Sales growth (%) | 5% | 4% | 3% | 2% | 0% |
| Operating profit margin | 8% | 9% | 10% | 10% | 10% |
| Incremental non-current asset investment (% of sales increase) | 5% | 6% | 3% | 2% | 0% |
| Incremental working capital investment (% of sales increase) | 6% | 5% | 4% | 4% | 0% |
Financial Information:
- Sales for the current year to 30 September 2020: ₦80 million
- Annual depreciation (equal to annual replacement of non-current asset expenditure): ₦2.0 million
- Par value of 6% debentures in issue (current market value ₦95.00, nominal value ₦100): ₦10.0 million
- Short-term investments held: ₦0.8 million
- Company tax rate: 20%
- Current WACC: 10%
Required:
a. Calculate the value of APL’s equity using SVA.
(12 Marks)
b. Outline three methods by which APL’s directors might raise the funds necessary for the proposed MBO of the company. (3 Marks)
(Total 15 Marks)
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- Tags: Competitive Advantage, Equity, Funding Methods, MBO, SVA, Valuation
- Level: Level 3
- Topic: Business Valuation Techniques
- Series: NOV 2022
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- 20 Marks
FM – Nov 2017 – L3 – Q2 – Mergers and Acquisitions
Calculate Raymond Plc.'s valuation, analyze Harold Limited's acquisition value, and assess the offer price from shareholders' perspectives.
Question
Raymond Plc. is a successful IT services company incorporated 10 years ago. It was listed on the Stock Exchange 3 years ago. The company has a broad customer base mainly consisting of small and medium-sized companies. Raymond Plc. has achieved rapid growth in recent years by obtaining regular business from satisfied customers and also by acquiring other IT services companies.
The Directors of Raymond Plc. have identified Harold Limited, an unlisted company, as a possible acquisition target. Harold Limited has a number of large multinational clients, and, in general, its clients tend to be larger than those of Raymond Plc. If successful, the acquisition would go ahead on January 1, 2018.
Forecast financial data for Raymond Plc. and Harold Limited as of December 31, 2017, are summarized below:
| Financial Item | Raymond Plc. | Harold Limited |
|---|---|---|
| Share capital (Ordinary ₦1 shares) | ₦150m | ₦40m |
| Market share price | ₦4.90 | N/A |
N/A: Not applicable (not listed).
Additional information:
- If Harold Limited were to remain an independent company, its Directors estimate that reported Profit After Tax would be ₦15 million for 2018 and then grow by 2% yearly in perpetuity;
- If the acquisition were to go ahead, Raymond Plc.’s Directors estimate that Harold Limited’s profit after tax would be 5% higher for 2018 than if the company remains an independent company, and that profit after tax would then grow by 3% yearly in perpetuity;
- The average ungeared Cost of Equity for the industry is 8%;
- Both Raymond Plc. and Harold Limited are wholly equity financed; and
- Profit after tax can be assumed to be a good approximation of free cash flow attributable to investors.
The Directors of Raymond Plc. are considering offering to purchase Harold Limited at a price of ₦7.00 per share. It is estimated that transaction costs of ₦8 million would be payable on the acquisition and that ₦2 million would be required in the first year to cover the costs of integrating the two companies.
Required:
- (a) Calculate:
- i. The value of Raymond Plc. as at December 31, 2017.
- ii. The value of Harold Limited as at December 31, 2017 before taking the possible acquisition of the company by Raymond Plc. into account.
- iii. The overall increase in value created by the acquisition of Harold Limited by Raymond Plc. (8 Marks)
- (b)
- i. Explain how value might be created by the proposed acquisition. (2 Marks)
- ii. Comment on the difficulties which Raymond Plc. is likely to face in realizing the potential added-value, after the acquisition. (2 Marks)
- (c) Evaluate the proposed offer price of ₦7.00 per share for Harold Limited from the point of view of:
- i. Harold Limited’s shareholders.
- ii. Raymond Plc.’s shareholders. (8 Marks)
(Total 20 Marks)
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- 15 Marks
AA – May 2017 – L2 – SC – Q5 – Internal Control Systems
Examination of internal control meaning, examples, and sources of audit evidence for completeness, ownership, and valuation.
Question
You are the Auditor of Bistro Bottling Limited (BBL), a major manufacturer and distributor of fruit juice drinks based in Lagos. A review of the previous year’s audit working papers revealed some weaknesses in internal controls with regard to safeguarding the company’s non-current assets.
The company uses a combination of both owned and leased motor vehicles for operational activities, including deliveries to customers. It has recently sold some old vehicles and bought new ones in a bid to lower motor vehicle running expenses.
During the planning of the audit, you have decided that motor vehicles will be a key area because of the likelihood of weaknesses in the company’s system of internal control over non-current assets.
You are required to:
- (a) Explain with suitable illustration the meaning of Internal Control. (4 Marks)
- (b) List FIVE examples of internal controls. (5 Marks)
- (c) Identify TWO sources of audit evidence you will obtain for each of the following: completeness, ownership, and valuation, to provide reasonable assurance with regard to the company’s assets and liabilities. (6 Marks)
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- Tags: Audit evidence, Completeness, Dividend valuation, Internal Control, Non-current Assets, Ownership, Valuation
- Level: Level 2
- Topic: Internal Control Systems
- Series: MAY 2017
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- 10 Marks
FR – Nov 2015 – L2 – Q7b – Fair Value Measurement (IFRS 13)
Explaining accounting treatment for investment property and calculating values for the financial statements.
Question
KOLA NITDA Nigeria Plc is a company engaged in the manufacturing of hand sanitizer to prevent Ebola disease. The following information relates to property owned by the company:
| N’000 |
|---|
| Land – Plot 404 Apapa Industrial Area |
| Building therein (acquired June 30, 2013) |
| Improvement to the building to extend rented floor capacity |
| Repairs and maintenance to investment property for the year |
| Rental received for the year |
Approximately six percent of the property floor space is used as the administrative head office of the company. The property can be sold only as a complete unit. The remainder of the building is leased out under operating leases. The company provides lessees with security services.
The company values investment property using the fair value model on December 31, 2014, which is the company’s year-end. Tewogbade & Co. (an independent valuer) valued the property at N144,000,000 on that date.
Required:
i. Advise the Directors of KOLA NITDA Nigeria Plc on how the property should be treated in the financial statements of the company as at December 31, 2014 in order to ensure strict compliance with provisions of IAS 40. (5 Marks)
ii. Calculate the value of investment property that should be disclosed in the statement of financial position as at December 31, 2014 and the amount that should be charged to the statement of profit or loss and other comprehensive income for the period then ended. (5 Marks)
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- Tags: Fair Value, IAS 40, Investment Property, Property Accounting, Revaluation Model, Valuation
- Level: Level 2
- Topic: Fair Value Measurement (IFRS 13)
- Series: NOV 2015
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- 1 Marks
FA – Nov 2012 – L1 – SA – Q6 – Financial Statements Preparation
Identifying the price for returnable containers after allowing for wear and tear.
Question
Returnable containers are charged out to the customers’ accounts when containers are sent to them. The amount placed on each container for financial statement purposes after allowing for wear and tear is …… price.
A. Charge-out
B. Return
C. Cost
D. Valuation
E. Replacement
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- Tags: Containers, Valuation, Wear and Tear
- Level: Level 1
- Topic: Financial Statements Preparation
- Series: NOV 2012
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- 1 Marks
FA – May 2014 – L1 – SA – Q16 – Partnership Account
Calculates the goodwill value based on super profit over five years.
Question
The Partnership of X, Y, and Z made a net profit for the past five years as shown below:
Year Profit (₦’000)
2009 30,000
2010 18,000
2011 9,000
2012 15,000
2013 21,000
The firm intends to admit V into the business and for this purpose has decided to fair value goodwill at 4 years purchase of the average super profits over the last 5 years on a normal profit of ₦6,000,000 per annum.
What is the value of goodwill?
A. ₦42,400,000
B. ₦46,400,000
C. ₦49,200,000
D. ₦50,400,000
E. ₦62,200,000
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- 1 Marks
FA – Nov 2021 – L1 – SA – Q20 – Partnership Accounting
This question addresses when goodwill can be valued in a partnership.
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- 1 Marks
FA – Nov 2022 – L1 – SA – Q20 – Partnership Accounts
Identify when goodwill can be valued in a partnership.
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- 6 Marks
FA – May 2017 – L1 – SB – Q4a – Partnership Accounts
Define goodwill, its recognition, and circumstances leading to its creation in partnership accounts.
Question
A number of factors will lead to the creation of goodwill in a partnership.
Required:
i. Define goodwill and explain its recognition in partnership accounts. (3 Marks)
ii. State THREE examples of circumstances in which goodwill may be created in a partnership. (3 Marks)
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- 12 Marks
FA – May 2017 – L1 – SB – Q2a – Accounting for Property, Plant, and Equipment (IAS 16)
Calculate the value of Land & Building, Plant & Machinery, and Motor Vehicle based on given transactions.
Question
a. The following transactions are extracts from the records of Votle Limited in 2016, the year of commencement of its business operations.
| Date | Transaction Description | Amount (₦’000) |
|---|---|---|
| 1 January | Cost of land acquisition brought forward | 7,500 |
| 1 January | Building construction work in progress brought forward | 9,675 |
| 10 January | Invoice price of imported machinery received | 13,000 |
| 10 January | Agency fees for land acquisition paid | 750 |
| 12 January | Discount on purchase of machinery | (400) |
| 12 January | Freight and insurance of machinery | 300 |
| 12 January | Import duties on machinery paid | 630 |
| 15 January | Cost of additional construction materials used paid | 3,550 |
| 21 January | Legal fees for land acquisition agreement paid | 350 |
| 25 January | Clearing agent’s fees for machinery paid | 315 |
| 31 January | Initial ground rent for land paid | 600 |
| 2 February | Annual ground rent for land paid | 250 |
| 7 February | Cost of fairly used motor vehicle paid | 3,750 |
| 14 February | Cost of haulage of machinery | 252 |
| 14 February | Cost of major repair to bring the motor vehicle into a usable condition | 1,550 |
| 22 February | Cost of construction of platform for machinery paid | 1,050 |
| 25 February | Cost of labour used in construction of building paid | 1,975 |
| 28 February | Architect’s fees in respect of building construction paid | 1,250 |
| 4 March | Cost of connection of power and water to machinery | 1,450 |
| 6 March | Repair and maintenance of motor vehicle | 250 |
| 10 March | Cost of testing the machinery | 603 |
| 15 March | Cost of commissioning the building | 950 |
Required:
Determine the value of the following non-current assets brought into use as at March 15, 2016.
i. Land and Building (4 Marks)
ii. Plant and Machinery (4 Marks)
iii. Motor Vehicle (4 Marks)
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- 4 Marks
AA – Nov 2020 – L2 – Q3a – Audit and Assurance Evidence
Name two auditor’s experts for pension funds and property valuation.
Question
Future Prospects Company Ltd is a multinational company operating in Ghana. Its core operations include management of pension funds and real estate development. In preparing the financial statements, they carry out an appraisal of the pension funds to assess its ability to pay benefits to contributors. Periodic revaluation of lands and buildings was also carried out.
Required:
In respect of valuation of pension funds, future payments to beneficiaries, and revaluation of properties, name two auditor’s experts on whom possible reliance will be placed during your audit of the company and the work each may perform.
(4 marks)
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- Tags: Auditor's Experts, Expert Reliance, Pension Funds, Property Revaluation, Valuation
- Level: Level 2
- Topic: Audit and Assurance Evidence
- Series: NOV 2020
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- 6 Marks
AA – May 2016 – L2 – Q5c – Audit and Assurance Evidence
This question focuses on the substantive audit procedures for verifying the valuation, completeness, and rights and obligations of property, plant, and equipment.
Question
(c) Describe TWO substantive procedures the external auditor of Okunka should adopt to verify EACH of the following assertions in relation to an entity’s property, plant and equipment:
(i) Valuation
(ii) Completeness
(iii) Rights and obligations.
(Note: Assume that the hospital adopts International Financial Reporting Standards). (6 marks)
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- 8 Marks
AA – Nov 2015 – L2 – Q1b – Audit and Assurance Evidence, Completion Procedures and Reporting
This question covers the audit procedures to confirm inventory existence, completeness, and valuation at the year-end.
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- Tags: Audit Procedures, Completeness, Evidence, Existence, Inventory, Valuation
- Level: Level 2
- Topic: Audit and Assurance Evidence, Completion Procedures and Reporting
- Series: NOV 2015
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- 15 Marks
AA – Nov 2021 – L2 – Q2b – Audit and Assurance Evidence
Describes the substantive procedures auditors should adopt to verify valuation, completeness, and rights and obligations of property, plant, and equipment (PPE).
Question
Describe FOUR (4) substantive procedures the external auditor of HMH should adopt to verify each of the following assertions in relation to an entity’s property, plant and equipment (PPE):
i) Valuation
ii) Completeness
iii) Rights and obligations
(Note: Assume that the hospital prepares Financial Statements in accordance with International Financial Reporting Standards)
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- Tags: Completeness, PPE, Rights and Obligations, Substantive Procedures, Valuation
- Level: Level 2
- Topic: Audit and Assurance Evidence
- Series: NOV 2021
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