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)
View Solution
In the absence of any information about realisable values and replacement costs, net asset value is on a book value basis. It is the sum of non-current assets and net current assets, less long-term debt, i.e. 595 + 125 – 70 – 160 = GH¢490 million.
ii) Dividend growth model; (3 marks)
View Solution
Total dividends of GH¢40 million are expected to grow at 4% per year and FCH Bank Ltd. has a cost of equity of 10%. Value of company = (40m x 1.04)/(0.1 – 0.04) = GH¢693 million.
iii) Earnings yield method. (3 marks)
View Solution
Profit after tax (earnings) is GH¢66.6 million and the finance director of FCH Bank Ltd. thinks that an earnings yield of 11% per year can be used for valuation purposes.
Ignoring growth, value of company = 66.6m/0.11 = GH¢606 million
Alternatively, profit after tax (earnings) is expected to grow at an annual rate of 5% per year and earnings growth can be incorporated into the earnings yield method using the growth model. Value of company = (66·6m x 1.05)/ (0.11 – 0.05) = GH¢1,166 million.
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)
View Solution
Earnings / Dividend
= 24,600/6,750 = 3.64
ii) Earnings per share (2 marks)
View Solution
Earnings available to equity holders/no of ordinary shares
24,600/15000 = 1.64
= 0.0484
iii) Price/earning ratio (2 marks)
View Solution
Price per share/earning per share
= 45/2.18 = 20.64