QUESTION 1

Medium ltd, a privately owned company, is considering a purchase proposal by Big ltd, a company listed on the Ghana Stock Exchange. The profit and loss account for the year ended 31st December 2019 together with the balance sheet as at that date for Medium ltd is below:

Profit and loss account for the year ended 31st December 2019 GHSmillion Profit before tax 10,800 Tax (2,700) Profit after tax 8,100 Proposed dividend (2,500) Retained profit 5,600 Income surplus bal. 1st 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) 44,100 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 Medium ltd has an employee share ownership scheme which is run by trustees with rules which prevent transfer of the Schemes assets to the company. Medium ltd is required to transfer 10% of its pre-tax profits t weo the scheme each year. The amount due for 2019 is yet to be transferred and the Schemes assets amounting to GHS7,300 million is included in the investments of Medium ltd. The cost of Medium ltds 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. Included in debtors of Medium ltd is an amount of GHS5,350 million due from Sanyo ltd, a major customer. Sanyo ltd has disputed the balance since 2013 on grounds that goods worth GHS3,850 million purported to have been supplied in 2012 were never received. Sanyo ltd also contended that payments made to Medium ltd amounting to GHS 1,260 million were not credited to its account.

Fixed assets of Medium ltd include goodwill of GHS3,500m considered worthless. It also includes GHS2,500m paid for patents. The patents represent a right to trade in a special product which is expected to generate cash flows of GHS950 million per annum indefinitely. The cost of capital of Medium ltd is 20% and the discounted present value of future cash payment in respect of the debentures is GHS13,200. The following projections were obtained from a five year corporate strategy document of Medium ltd:

Year net cash flows depreciation GHSmillion GHSmillion 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. Land and buildings is included in fixed assets of Medium ltd 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 ltd. The fair value of the remaining tangible fixed assets of Medium ltd is GHS27,500 million. During the annual stock take in 2019 closing stock of Medium ltd was understated by GHS4,700 million. This error has not been rectified. The price earnings ratio and dividend yield of Big ltd and other quoted companies in the same industrial sector in which Medium ltd operates are 18 and 7.5% respectively. Debenture interest has been paid in full but 40% of preference dividend for 2019 is outstanding. Corporate tax provision for 2019 is expected to reduce by GHS500 million due to effects of stocks, bad debts and goodwill adjustments. 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 5 0.4019 6 0.3349

Required: Determine the value to be placed on the shares of Medium ltd using any three methods of valuation as far as the information given permits. [25 MARKS]

QUESTION 2 Draft statement of financial position of Santos Ltd as at 15th August, 2018 is as follows:

Total non-current assets 60,000 Patents 80,000 140,000 Current assets Inventory 40,000 Receivables 28,000 68,000 Total assets 208,000

GHS1 equity shares 60,000 Retained earnings (30,000) 30,000 Long term liabilities 4% fixed charge debentures 70,000 5% floating charge debentures 50,000 6% preference shares 20,000 140,000 170,000 Current liabilities Payables 30,000 Overdraft 8,000 38,000 208,000

You are given the following information: The 4% debentures are secured by a fixed charge on the building included within Total Non-Current Assets at a carrying value of GHS50,000. The debenture is due for repayment in 18 months time The 5% debentures were issued 3 years before the 4% fixed charge was created and are secured by a floating charge over the inventory and receivables. The debt is repayable in 5 years time Included within payables are GHS8,000 arrears of wages to be paid in the scheme and GHS2,400 other preferential creditors but not yet paid. the scheme devised by the directors is as follows: the building is to be transferred to the fixed charge debenture holder in full settlement and is then to be leased back under a finance lease at the fair value of GHS70,000; the lease terms have an implicit rate of interest of 4.5% per annum and involve installments of GHS6,000 until the full amount due has been paid the entity has received an offer of GHS25,000 for the patents and the directors propose to impair them to that value inventory is to be re-valued to GHS36,000 and receivables to GHS25,000 the GHS1 equity shares are to be cancelled and replaced by 500,000 10 pesewas equity shares, credited as to 1 pesewa each the directors are then to make a call on the equity shareholders for the remaining 9 pesewas per share payable immediately the 5% floating charge debentures are to be paid 50% of the amount due to them in cash immediately the remaining amount due to the floating charge debenture holders is to be cancelled and replaced by GHS27,000 6% floating charge debentures secured on the current assets, repayable in 10 years time the 6% preference shareholders are to forego two years outstanding dividends (not recognized in the statement of financial position), the preference shares are to be cancelled and replaced with 100,000 equity shares of 10 pesewas each credited as fully paid the trade payables have agreed to be settled in full by a payment of 40 pesewas in the GHS1 Required: Prepare the revised statement of financial position for Santos Ltd on the assumption that the directors scheme is given approval by the court and by all those stakeholders who are affected. [25 MARKS]

QUESTION 3 Awen Ltd is a manufacturer of machine tools and is at present contemplating an issue of GH2,000,000 10% debenture stock (2020) in order to assist the remodelling of its present production facilities. Some shareholders are reluctant to approve additional long-term debt due to the fact that the machine tools industry is subject to wide-ranging fluctuations in sales and profits.

A group of shareholders have approached you and asked you to comment on the performance of Awen Ltd as compared with industrial averages and to make recommendations as to whether they should approve the proposed additional long-term debt.

Abbreviated financial statements and typical ratios for firms in the machine tools industry are as follows:

Awen Ltd Statement of Comprehensive Income for the year ended 31/12 2005 2004 GH000 GH000 Sales 23,500 20,500 Cost of Sales 16,000 14,000 Gross profit 7,500 6,500 Selling expenses (2,000) (1,900) Administrative expenses (3,000) (2,600)

Operating profit 2,500 2,000 Interest cost (500) (300)

Profit before tax 2,000 1,700 Taxation (1,200) (1,020) Profit after tax 800 680 Income surplus a/c 6,365 6,090

Awen Ltd Statement of Financial Position as at 31/12

2005 2004 GH000 GH000 Non Current assets tangible 6,315 5,600 Intangible 800 750 7,115 6,350 Current assets: Stock 5,100 3,200 Debtors 2,900 1,900 Prepaid expenses 100 100 Cash & Bank 600 590 8,700 5,790 Total Assets 15,815 12,140

Capital & Liabilities: Stated capital 350 350 Income surplus 6,365 6,090 8% Debenture stock (2006) 5,500 3,300 12,215 9,740

Current Liabilities 3,600 2,400 15,815 12,140

Typical industrial ratios for 2005 are

Gross profit margin 34% Current ratio 2.5:1 Quick ratio 1.2:1 Average age of debtors 30 days Stock turnover 5 times Interest earned 8 times Debt/Equity ratio 0.7:1 Net profit before tax to net assets 19.5%

You are required:

Compute the above ratios for Awen Ltd for both 2004 and 2005, taking into account the stock valuation at 31/12/2003 of GH 2,500,000 and Debtors balance on the same date of GH 1,700,000. [10 marks]

In a report format, comment on the performance of Awen Ltd and recommend a course of action to the group of shareholders. [15 marks]