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Quality Bottling Company [QBC] was incorporated as a private company in 2010. All the shares of the company are held by the Managing Director, Mr

Quality Bottling Company [QBC] was incorporated as a private company in 2010. All the shares of the

company are held by the Managing Director, Mr Kofi Sampana and his family members.. After ten years

of successful operation, the Board of Directors decided to get the company listed on Ghana Stock

Exchange. As a first step, the Board decided to make an initial public offer [IPO] on the strength of the

company's 2020 financial statements. Super Beverage Ltd, a listed company and a competitor of QBC

current results show price-earning ratio of 5 earnings yield of 20%, and dividend yield of 18%.

The summarised unaudited financial statements of QBC are as follows:

Statement of profit or Loss for the year ended 31 December 2020

GHS'000

Sales Revenue ( note i)

Cost of sales 100,000

(48,000)

----------Gross Profit 52,000Operational Expenses

Finance costs [Interest on debenture stocks] (23,200)

(800)

---------Net Profit

Taxation (@ 25%) 28,000

( 7,000)

----------Profit for the period 21,000

=====Statement of financial position as at 31 December 2020

ASSETS GHS'000Non-current assets (note ii)

Property at valuation (Land GHS 2 m ; buildings GHS 18m) (ii) 20,000Plant and equipment (ii) 16,000Intangible Asset - Patent Right (ii)

Financial asset (fair valued through profit or loss at 1/1/2020) (iii) 2,000

5,000--------43,000Current Assets (note iv) 20,000---------Total Assets 63,000=====

EQUITY AND LIABILIES

Stated Capital (4 million shares issued at GHS2.00 per share) 8,000Retained Earnings 38,640----------46,640(note v) Non-current liabilities

20% Debenture Stocks [2020-2025] 4,000Deferred Tax provision -1 January 2020 (note vi) 3,000Current liabilities

Trade Payables 2,360Current Tax liability 7,000

Total Equity and Liabilities 63,000

=====The Managing Director, Mr Sampana has contacted you to assist in determining the true value of the

business as at 31 December 2020 and to provide a range of possible issue price based on Net assets,

Dividend Yield and Earnings Yield .

Your examination of the financial statements and the underlying records revealed the following additional

information:

i) The sales revenue includes GHS16 million of revenue for credit sales made on a 'sale or

return' basis. At 31 December 2020, customers who had not paid for the goods, had the right to return

GHS5.2 million of them. QBC applied a mark up on cost of 30% on all these sales. In the past, QBC's

customers have sometimes returned goods under this type of agreement.

(ii) The depreciable non-current assets have not been depreciated for the year ended 31 December 2020.

QBC has a policy of revaluing its land and buildings at the end of each accounting year. The

values in the above statement of financial position are as at 1 January 2020 when the buildings

had a remaining life of 18 years. A qualified surveyor has valued the land and buildings at 31

December 2020 at GHS22 million.

Plant and equipment are depreciated at 12.5% per annum on the reducing balance basis. As at

31 December 2020, the value in use and the fair value less cost to sell were assessed at GHS14.2

million and GHS13.5 million respectively.

The patent right was acquired in January 2020 at a cost of GHS2 million. It is expected to be used

for 5 years after which the right of usage would have to be renewed in January 2022.

iii) The financial assets at fair value through profit or loss are held in a fund whose value changes

directly in proportion to a specified market index. At 1 January 2020 the relevant index was 240,0 and at

31 December 2020 the index was 259.2

(iv) In late December 2020, the directors of QBC discovered a material fraud perpetrated by the

company's credit controller that had been continuing for some time. Investigations revealed that a total of

GHS6 million of the trade receivables (included in current assets) as shown in the statement of financial

position at 31 December 2020 had in fact been paid and the money had been stolen by the credit

controller. An analysis revealed that GHS2 million had been stolen in the year to 31 December 2019 with

the rest being stolen in the current year. QBC is not insured for this loss and it cannot be recovered from

the credit controller since his whereabout is unknown.

(v) The 20% GHS4 million Debenture stocks were issued on 1 January 2020 at par. Interests are

payable annually in arrears at 31 December. The stocks would be redeemed at a premium of GHS762,500

on 31 December 2019; thus yielding an effective interest rate of 25% per annum.

(vi) As at 31 December 2020, the company's taxable temporary differences had increased to GHS16

million. The deferred tax relating to the increase in the temporary differences should be taken to profit or

loss. The applicable income tax rate is 25%.

The above figures do not include the estimated provision for current income tax on the profit for the year

ended 31 December 2020. After allowing for any adjustments required in items (i) to (v)The directors have estimated the provision of current tax liability for 2020 at 25% of adjusted profit. (This is in

addition to the deferred tax effects of item (vi)).

(vii) During the current year,(2020) dividends of GHS12.36 million were paid. These have been correctly

accounted for in the above financial statements. The comparative figure for the previous year (2019) was

GHS12 million. The dividend growth rate achieved in 2020 is expected to be sustained in the years ahead

Required

a) Redraft the financial statements above (taking into consideration the additional information

(i) - (vi) above.

b)Based on the revised financial statements, provide a range of possible issue prices per share using

Net Assets Method , Dividend Growth Method and Earnings Yield/Price Earning Ratio Method .

c) Advise Mr Sampana on the most appropriate price at which the shares should be issued

(based on the answer to (b) above.

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