Kwaafi and Sons Ltd operates a newspaper business. The business has various segments, namely: traditional media, online news, events and printing. The company’s new strategy is to concentrate on online news, outsource its printing services and discontinue the printing segment.
The printing segment is one of the company’s cash cows, generating 30% of its revenue of GH¢28,000,000 annually. The company aims to take advantage of the Continental Free Trade Agreement to serve other African countries.

Before deciding to concentrate on online news, the company undertook an extensive retooling of its printing segment. The Finance Director has produced the following information:
i) A new coloured printer was purchased to replace a 15-year-old printer, which was purchased for GH¢3,000,000 and is now obsolete but can be sold as scrap for GH¢15,000;

ii) The new coloured printer was purchased two years ago at GH¢8,000,000 and has a useful life of six years.

iii) A contract has been signed for the servicing of the equipment at a retainer fee of GH¢755,250 per annum over the life of the equipment;

iv) The stock of toners and rollers for the old printer worth GH¢280,000 is obsolete at no cost.

v) Replacement parts for the new equipment, which are enough for the useful life of the equipment is valued at GH¢300,000;

vi) Special carbonated tonners for the old printer costing GH¢230,000 is unusable and has to be disposed of at a residual value of GH¢13,000 as soon as possible;

vii) Eighteen (18) rolls of printing sheets and twenty-five (25) boxes of metal plates are valued at GH¢240,000 and GH¢420,000, respectively. These need replacement every year at similar costs;

viii) Annual rent and rates of GH¢800,000, payable at the end of each year, increases by 10% every 2 years.

ix) Other operating expenses of GH¢3,200,000, payable at the end of the year, increases at 10% annually until year 3.

x) It is estimated that the printing segment will now generate 10% more revenue per annum for the New Printer’s remaining life. Depreciation is based on the straight-line method;

xi) For valuation purposes, an expected rate of return of 30% has been agreed upon among the parties. Ignore taxation and inflation.

Following the announcement to discontinue the printing segment, the senior staff of the segment proposed to raise funds to buy the assets of the segment. They obtained invoices of similar assets and used the prices to make an offer to the Board of Directors.
The Finance Director disagreed and suggested that an expert valuer value the assets of the company and its operations. The senior staff have objected to the valuation proposals arguing that valuations are subjective and may not reflect the accurate value of the assets to be disposed off by the company.

Required:
a) Distinguish between market price and value in the context of business valuation.     (3 marks)

b) Explain why a valuation process is described as subjective. (2 marks)

c) Calculate the value of the printing segment using the discounted cash flow method. (12 marks)

d) Calculate the value of the printing segment using the assets-based method. (3 marks).

The directors of Carmen Ltd, a large conglomerate, are considering the acquisition of the entire share capital of Manon Ltd, a private limited company which manufactures a range of engineering machinery. Neither company has any long-term debt capital. The directors of Carmen Ltd believe that if Manon Ltd is taken over, the business risk of Carmen Ltd will not be affected.

The accounting year of Manon Ltd ends on 31 December. Its Statement of Financial Position as at 31 December 2018 is expected to be as follows:

Manon Ltd’s summarized statement of profit or loss extract for the five years to 31 December 2018 is as follows:
The following additional information are available:
i) There have been no changes in the issued share capital of Manon Ltd during the past five years.
ii) The estimated values of Manon Ltd’s PPE and inventory and work-in-progress as at 31 December 2018 are:

iii) It is expected that 2% of Manon’s debtors at 31 December 2018 will be uncollectible.
iv) The cost of capital of Carmen Ltd is 9%. The directors of Manon Ltd estimate that the shareholders of Manon Ltd require a minimum return of 12% per annum from their investment in the company.
v) The current P/E ratio of Carmen Ltd is 12. Quoted companies with business activities and profitability similar to those of Manon Ltd have P/E ratios of approximately 10, although these companies tend to be much larger than that of Manon Ltd.

Required:
Estimate the value of the total equity capital of Manon Ltd as at 31 December 2018 using each of the following basis:
a) Book value    (2 marks)

b) Replacement cost    (4 marks)

c) Realizable value    (4 marks)

d) The Gordon dividend growth model    (5 marks)

e) The P/ E ratio model    (5 marks)

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:

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)

Restwell Ltd, a hotel leisure company, is currently considering taking over a smaller private limited company, Staygood Ltd. 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:

The company’s earnings yield is 12%.
Required:
i) As a Finance Manager, calculate the value of the company based on the present value of expected earnings.             (6 marks)

ii) Explain THREE problems associated with using P/E method for valuing firms.                                                        (3 marks)

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;                                                                                                    (3 marks)

ii) Dividend growth model;                                                                                                   (3 marks)

iii) Earnings yield method.                                                                                                   (3 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                                30
Ordinary Shares                                                        15,000                                  45

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.
Required:
Calculate in respect of ordinary shares:
i) Dividend cover                                                                                                  (2 marks)

ii) Earnings per share                                                                                            (2 marks)

iii) Price/earning ratio                                                                                           (2 marks)

Papa’s Skin Ltd is an Accra-based clothing company owned and managed by its two founders. The company has been selling to only domestic consumers in Ghana since inception. The founders think it is time to extend the operations of the company to foreign markets, particularly those in neighbouring West African countries. Moving into foreign markets requires additional financing and capabilities, which the company does not have. The owners have agreed on ceding 40% stake in their company to a strategic investor who would provide the additional financing and capabilities needed to compete successfully in the international business environment. However, they are not sure of what range of prices to accept for the shares they would give up.
Below is a summary of financial data for Papa’s Skin Ltd for the recent financial year:

The following information are relevant to the position and value of Papa’s Skin Ltd:
1) The assets of Papa’s Skin Ltd were valued just after the recent financial statements were published. Inventories and trade receivables, which are included in current assets, were written down by GH¢80,000 and GH¢95,000 respectively. Property, plant and equipment were valued at GH¢52,400,000.
2) Papa’s Skin Ltd falls into the fabrics and clothing industry. The average P/E ratio for listed equity stocks in the industry is 10. The average required return on listed equity stocks in the industry is 16%.
3) Marketability of shares in Papa’s Skin Ltd is limited as its equity stock is not listed on the stock exchange. Consequently, investors demand a marketability risk premium of 7% above the industry average required return on equity in order to invest in the equity stock of Papa’s Skin Ltd.
4) Earnings and dividends of Papa’s Skin Ltd are expected to grow by 5% every year to perpetuity.

Required:
i) Estimate an appropriate required rate of return on the equity stock of the Papa’s Skin Ltd.                                     (2 marks)

ii) Estimate a range of suitable considerations for 40% stake in Papa’s Skin Ltd using the net assets method, P/E ratio method, and dividend valuation method.                                                                                                                                   (12 marks)

Sankofa Ltd has a dividend cover of 4 times and recorded the following earnings after tax.

Required:
Calculate the average dividend growth rate for Sankofa Ltd.                                                                                  (5 marks)