The shareholders of Wunam Bank (Ghana) Limited, have decided to sell the company to GCC Bank (Ghana) Limited following their inability to recapitalize the company as being demanded by the Bank of Ghana. The statement of financial positions of the two banks as at 31st March 2018 are given below.
The following additional information relate to Wunam Bank Ltd;
i) Wunam Bank Ltd. carries a huge non-performing loan portfolio. It is estimated that only 40% of the outstanding loans are recoverable.
ii) Investments represent 91-Day Treasury Bills held as secondary reserves. An audit has shown that the investments were overstated in 2017 as interest on investments for that year amounts to GH¢4.15 million.
iii) Other assets include long outstanding debits amounting to GH¢3.6 million. These are not represented by tangible assets.
iv) Deposits amounting to GH¢3.75 million could not be accounted for. This phenomenon has prevailed since 2014 but has not been provided for in the accounts.
v) Property, plant and equipment include an old banking software amounting to GH¢1.25 million. This is considered worthless. The remaining tangible fixed assets have been revalued at GH¢15.3 million.
vi) Cash and balances with other banks include an amount of GH¢2.4 million due from Sakara Rural Bank Ltd which was liquidated in 2016.
vii) Other liabilities include interest earned on investments amounting to GH¢3.15 million.
viii) Goodwill was assessed at 2.5% of adjusted deposits and current accounts.
ix) Wunam Bank Ltd. has been investing each year in Government bonds to provide funds in order to install Automatic Teller Machines and to open two ultra-modern branches in Takoradi and Kumasi respectfully. This practice is only known to the Managing Director and the Finance Manager, and the investments are worth GH¢12.6 million as at 31 March, 2018.
x) The stated capital of Wunam Bank Ltd. is made up of 100 million ordinary shares of no par value.
Required:
a) Identify FOUR (4) factors you would consider in determining the value to be placed on assets when using the net assets approach to valuation of Wunam Bank Ltd. (4 marks)
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i) Consideration of whether or not the assets should be professionally valued.
ii) The existence of hidden liabilities such as contingent liabilities, deferred taxes, redundancy payments, among others
iii) The realisability of receivables such as debtors and other bills receivables. Also consider the recoverable amount of inventories.
iv) Consideration of whether or not the assets can be separately disposed of in the open market.
v) Consideration of whether or not there are prior charges on any of the assets.
vi) The specific valuation basis to use whether it should be going concern basis, replacement cost basis, breakup basis. (Any four points)
b) Determine the value to be placed on the shares of Wunam Bank Limited using the net assets approach to valuation. (5 marks)
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Price of a share GH¢2,767,500/100,000,000 = GH¢0.0277 (10 ticks x 0.50 mark per tick = 5 marks)
c) Prepare the statement of financial position of GCC Bank (Ghana) Limited after the takeover using your answer in (b) above. Assume the following: The purchase consideration was duly settled; GCC Bank Ltd. took over all assets and liabilities; and Goodwill was written off. (6 marks)
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(A maximum of 24 ticks attracting 0.25 marks per tick = 6 marks)