At a meeting of the Directors of the Alpha Company Limited – a privately owned company- in May 1975 the recurrent question is raised as to how the company is going to finance its future growth and at the same time enable the founders of the company to withdraw a substantial part of their investment. A public quotation was discussed in 1974 but because of the depressed nature of the stock market at that time consideration was deferred. Although the matter is not of immediate urgency the Chairman of the company – one of the founders- produces the following information which he has recently obtained from a firm of financial analysts in respect of two publicly quoted companies Beta Limited and Gamma Limited which are similar to Alpha Limited in respect to size, asset composition, financial structure and product mix.

On the basis of the above information, the Chairman asked of your opinion on what Alpha Ltd was worth in 1974. The only information you have available at the meeting in respect of Alpha Limited is the final accounts for 1974 which discloses the following:

.                                                                                           Alpha Limited
Share Capital (no variation for 8 years)                        100,000 Ordinary GH¢1 Share
Post-Tax Earnings                                                             GH¢400,000
Gross Dividends                                                                GH¢100,000
Book Value                                                                         GH¢3,500,000

From memory, you are of the view that the post-tax earnings and gross dividends for 1974 were at least 1/3rd higher than the average of the previous five years.

Required:                                                   
Make full use of the information above to:
i) Answer the question from the Managing Director and                                                                                             (11 marks)

ii) Discuss FOUR (4) factors to be taken into account in trying to assess the potential market value of shares in a private company when they are first offered public subscription.                                                                                           (4 marks)

DoGood Ltd is evaluating Phinex Ltd using the Free Cash Flow to the Firm (FCFF) and Free Cash Flow to Equity (FCFE) valuation approaches.
DoGood Ltd has gathered the following information (in current Ghana Cedis terms):

• Phinex Ltd has net income of GH¢250 million, depreciation of GH¢90 million, capital expenditures of GH¢170 million, and an increase in working capital of GH¢40 million.
• Phinex Ltd will finance 40% of the increase in net fixed assets (capital expenditures less depreciation) and 40 % of the increase in working capital with debt financing.
• Interest expenses are GH¢150 million. The current market value of Phinex’s outstanding debt is GH¢1,800 million.
• FCFF is expected to grow at 6.0% indefinitely, and FCFE is expected to grow at 7.0%.
• The tax rate is 30%.
• Phinex Ltd is financed with 40 % debt and 60% equity. The before-tax cost of debt is 9% and the before-tax cost of equity is 13%.
• Phinex Ltd has 10 million outstanding shares.

Required:
i) Using the FCFF valuation approach, estimate the total value of the firm, the total market value of equity, and the value per share.                                                                                                                                                                                 (6 marks)

ii) Using the FCFE valuation approach, estimate the total market value of equity and the value
per share.                                                                                                                                                                          (6 marks)