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Quality Handicraft Ltd [QHL] produces handicrafts for both local and foreign market. The company was incorporated in the year 2008 and now employs about 150

Quality Handicraft Ltd [QHL] produces handicrafts for both local and foreign market. The company was incorporated in the year 2008 and now employs about 150 craftsmen.

The shareholders of QHL mainly comprise the original founder and close family members who would now like to realize their investment. In order to arrive at an estimate of what they believe the business is worth, they have identified a long established quoted company, Suama Handicraft Company [SHC] which has similar business, though it also produces for the European market.

Summarized financial statistics for the two companies for the most recent financial year are as follows:

Issued shares (million)

QHL

8

SHC

20

Net assets value [GHC ’million]

14.4

30

Earnings per share (pesewas)

35

28

Dividend per share (pesewas)

20

24

Debt: Equity ratio

1:7

1:6.5

Share price (as quoted on the stock market)

- pesewas

-

160

Expected rate of growth in earnings/dividends                     5%            5.%

Additional Information:

i.         The net assets of QHL stated above are the net book values of tangible non-current assets plus working capital. However:

·      A recent valuation of the buildings was GHC1,500,000 above book value

·      An investment held which is designated as available for sale with a carrying value of GHC1,000,000 is fair valued at GHC1,100,000

·      Due to a dispute with one of their clients, an additional allowance for bad debts of GHC750,000 could prudently be made.

·      An item of plant with a carrying value of GHC800,000 is assessed to have value-in-use of GHC760,000   and fair value less cost to sell of GHC780,000.

ii.     Growth rate should be assumed to be constant per annum. QHL’s earnings growth rate estimate was provided by the marketing manager, based on expected growth in sales adjusted by normal profit margins. SHC’s growth rates are gleaned from press reports.

iii.   The dividend yield of SHC approximates its cost of equity.

Required:

(a)       Compute a range of valuations for the business of QHL, using the information available and stating any assumptions made. Use the following methods for the valuation (Net Assets, Price- earning method and dividend growth methods)                                                              

(b)          Comment on the strengths and weaknesses of the methods used in (a) and their suitability for valuing 

Note: The additional information (i) may affect the net asset value and the earnings per share stated above. Ignore tax implications.

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