11:271 + LTE 4 Hawawu CR QUESTION 1.docx QUESTION 1 Medium Itd, a privately owned company, is considering a purchase proposal by Big Ind, a company listed on the Ghana Stock Exchange. The profit and loss account for the year ended 31 December 2005 together with the balance sheet as at that date for Medium Itd is below: Profit and loss account for the year ended 31 December 2005 GHS million Profit before tax 10.800 Tax 2.2003 Profit after tax 8.100 Proposed dividend (2.500) Retained profit 5,600 Income surplus bal. 1 January 2005 6.400 Income surplus bal. 31 December 2005 12.000 Balance sheet as at 31 December 2005 Fixed assets 38,030 Investments 12,600 Stocks 8,360 Debtors 6,450 Bank and cash 3.250 Creditors and accruals (6,350) Tax (1.540) Bank overdraft (5,000) Dividend (1.700) 20% debentures 10.000) Stated capital: 5,000,000 ordinary shares 15,000 2,000,000 15% preference shares 8,000 Income surplus 12,000 Capital surplus 3.420 Share deals 5.680 44.100 Additional information i. Medium ltd has an employee share ownership scheme which is run by trustees with rules which prevent transfer of the Scheme's assets to the company. Medium Ind is required to ransfer 10% of its pre-tax profits to the scheme cach year. The amount due for 2005 is yet to be transferred and the Scheme's assets amounting to GHS7,300 million is included in the investments of Medium lid 11:271 + LTE 16 Hawawu CR QUESTION 1.docx ii. The cost of Medium Ind's investment is GHS3,600 million but is included in the above balance sheet at its current market value. Recent investigation has shown that its current market value has declined by GHS2,000 million. it. Included in debtors of Medium Ind is an amount of GHS5,350 million due from Sanyo ltd, a major customer. Sanyo Itd has disputed the balance since 1999 on grounds that goods worth GHS3,850 million purported to have been supplied in 1998 were never received. Sanyo ltd also contended that payments made to Medium Ind amounting to GHS 1,260 million were not credited to its account iv. Fixed assets of Medium Ind include goodwill of GHS3,500m considered worthless. It also includes GHS2,500m paid for patients. The patients represent a right to trade in a special product which is expected to generate cash flows of GHS950 million per annum indefinitely v. The cost of capital of Medium Ind is 20% and the discounted present value of future cash payment in respect of the debentures is GHS13.200. vi. The following projections were obtained from a five year corporate strategy document of Medium lat Year net cash flows depreciation GHS'million GHS million 2006 5.200 1,020 2007 7.000 1,500 2008 6,400 2.300 2009 8,500 2.450 2010 10,200 2,700 Cash flows are assumed to accrue at the end of each financial year vii. Land and buildings is included in fixed assets of Medium Iod at its carrying amount of GHS4,300 million This has been revalued at GHS6,800 million by independent valuers for purpose of the impending sale of the company to Big Itd viii. The fair value of the remaining tangible fixed assets of Medium Ind is GHS27.500 million. During the annual stock take in 2005 closing stock of Medium Itd was understated by GHS4,700 million. This error has not been rectified ix. The price carnings ratio and dividend yield of Big Itd and other quoted companies in the same industrial sector in which Medium Itd operates are 18 and 7.5% respectively. x. Debenture interest has been paid in full but 40% of preference dividend for 2005 is outstanding xi. Corporate tax provision for 2005 is expected to reduce by GHSS00 million due to effects of stocks, bad debts and goodwill adjustments xii. The present value of GHS1.00 at a discount rate of 20% is as follows 11:271 + LTE 1+ Hawawu CR QUESTION 1.docx WW corporate strategy document of Medium Ind: net cash flows depreciation GHS'million GHS'million 2006 5,200 1,020 2007 7.000 1,500 2008 6,400 2.300 2009 8,500 2.450 2010 10.200 2,700 Year Cash flows are assumed to accrue at the end of each financial year. vii. Land and buildings is included in fixed assets of Medium Ind at its carrying amount of GHS4300 million This has been revalued at GHS6,800 million by independent valuers for purpose of the impending sale of the company to Big Itd. viii. The fair value of the remaining tangible fixed assets of Medium Itd is GHS27,500 million. During the annual stock take in 2005 closing stock of Medium Itd was understated by GHS4,700 million. This error has not been rectified. ix. The price earnings ratio and dividend yield of Big Itd and other quoted companies in the same industrial sector in which Medium ltd operates are 18 and 75% respectively. X. Debenture interest has been paid in full but 40% of preference dividend for 2005 is outstanding xi. Corporate tax provision for 2005 is expected to reduce by GHS500 million due to effects of stocks, bad debts and goodwill adjustments. xii. The present value of GHS1.00 at a discount rate of 20% is as follows: Year Discount factor 0 1.0000 1 0.8333 2 0.6944 3 0.5789 4 0.4823 0.4019 0.3349 Required Determine the value to be placed on the shares of Medium Itd using any three methods of valuation as far as the information given permits. 1 Page 11:271 + LTE 4 Hawawu CR QUESTION 1.docx QUESTION 1 Medium Itd, a privately owned company, is considering a purchase proposal by Big Ind, a company listed on the Ghana Stock Exchange. The profit and loss account for the year ended 31 December 2005 together with the balance sheet as at that date for Medium Itd is below: Profit and loss account for the year ended 31 December 2005 GHS million Profit before tax 10.800 Tax 2.2003 Profit after tax 8.100 Proposed dividend (2.500) Retained profit 5,600 Income surplus bal. 1 January 2005 6.400 Income surplus bal. 31 December 2005 12.000 Balance sheet as at 31 December 2005 Fixed assets 38,030 Investments 12,600 Stocks 8,360 Debtors 6,450 Bank and cash 3.250 Creditors and accruals (6,350) Tax (1.540) Bank overdraft (5,000) Dividend (1.700) 20% debentures 10.000) Stated capital: 5,000,000 ordinary shares 15,000 2,000,000 15% preference shares 8,000 Income surplus 12,000 Capital surplus 3.420 Share deals 5.680 44.100 Additional information i. Medium ltd has an employee share ownership scheme which is run by trustees with rules which prevent transfer of the Scheme's assets to the company. Medium Ind is required to ransfer 10% of its pre-tax profits to the scheme cach year. The amount due for 2005 is yet to be transferred and the Scheme's assets amounting to GHS7,300 million is included in the investments of Medium lid 11:271 + LTE 16 Hawawu CR QUESTION 1.docx ii. The cost of Medium Ind's investment is GHS3,600 million but is included in the above balance sheet at its current market value. Recent investigation has shown that its current market value has declined by GHS2,000 million. it. Included in debtors of Medium Ind is an amount of GHS5,350 million due from Sanyo ltd, a major customer. Sanyo Itd has disputed the balance since 1999 on grounds that goods worth GHS3,850 million purported to have been supplied in 1998 were never received. Sanyo ltd also contended that payments made to Medium Ind amounting to GHS 1,260 million were not credited to its account iv. Fixed assets of Medium Ind include goodwill of GHS3,500m considered worthless. It also includes GHS2,500m paid for patients. The patients represent a right to trade in a special product which is expected to generate cash flows of GHS950 million per annum indefinitely v. The cost of capital of Medium Ind is 20% and the discounted present value of future cash payment in respect of the debentures is GHS13.200. vi. The following projections were obtained from a five year corporate strategy document of Medium lat Year net cash flows depreciation GHS'million GHS million 2006 5.200 1,020 2007 7.000 1,500 2008 6,400 2.300 2009 8,500 2.450 2010 10,200 2,700 Cash flows are assumed to accrue at the end of each financial year vii. Land and buildings is included in fixed assets of Medium Iod at its carrying amount of GHS4,300 million This has been revalued at GHS6,800 million by independent valuers for purpose of the impending sale of the company to Big Itd viii. The fair value of the remaining tangible fixed assets of Medium Ind is GHS27.500 million. During the annual stock take in 2005 closing stock of Medium Itd was understated by GHS4,700 million. This error has not been rectified ix. The price carnings ratio and dividend yield of Big Itd and other quoted companies in the same industrial sector in which Medium Itd operates are 18 and 7.5% respectively. x. Debenture interest has been paid in full but 40% of preference dividend for 2005 is outstanding xi. Corporate tax provision for 2005 is expected to reduce by GHSS00 million due to effects of stocks, bad debts and goodwill adjustments xii. The present value of GHS1.00 at a discount rate of 20% is as follows 11:271 + LTE 1+ Hawawu CR QUESTION 1.docx WW corporate strategy document of Medium Ind: net cash flows depreciation GHS'million GHS'million 2006 5,200 1,020 2007 7.000 1,500 2008 6,400 2.300 2009 8,500 2.450 2010 10.200 2,700 Year Cash flows are assumed to accrue at the end of each financial year. vii. Land and buildings is included in fixed assets of Medium Ind at its carrying amount of GHS4300 million This has been revalued at GHS6,800 million by independent valuers for purpose of the impending sale of the company to Big Itd. viii. The fair value of the remaining tangible fixed assets of Medium Itd is GHS27,500 million. During the annual stock take in 2005 closing stock of Medium Itd was understated by GHS4,700 million. This error has not been rectified. ix. The price earnings ratio and dividend yield of Big Itd and other quoted companies in the same industrial sector in which Medium ltd operates are 18 and 75% respectively. X. Debenture interest has been paid in full but 40% of preference dividend for 2005 is outstanding xi. Corporate tax provision for 2005 is expected to reduce by GHS500 million due to effects of stocks, bad debts and goodwill adjustments. xii. The present value of GHS1.00 at a discount rate of 20% is as follows: Year Discount factor 0 1.0000 1 0.8333 2 0.6944 3 0.5789 4 0.4823 0.4019 0.3349 Required Determine the value to be placed on the shares of Medium Itd using any three methods of valuation as far as the information given permits. 1 Page