QUESTION 2

In 2015, the shareholders of Depot Ltd decided to sell their equity stake in the company. The company is not listed and the new shareholders plan to prepare the company for listing once the acquisition was completed. The summarized financial statements of Depot Ltd for the year ended 30th June, 2015 are stated below: Statement of Income for the year ended 30thJune, 2015

GH

Profit before tax. 24,000,000

Taxation. (8,000,000)

Profit after tax. 16,800,000

Dividends. 3,200,000

Retained earnings. 13,600,000

Statement of Financial Position as at 30th June, 2015

GH

Non-Current Assets. 62,400,000

Current Assets. 21,400,000 83,800,000

Current Liabilities. 12,800,000

LT Liabilities. 35,000,000

4 7,800,000

Net Assets. 36,000,000

Stated Capital. 20,000,000

Retained Earnings. 16,000,000 36,000,000

The following additional information is provided;

1) The discounted present value of future cash payments in respect of the long term loan is GH48,800,000.

2) The stated capital of Depot Ltd is made up of 25,000,000 ordinary shares of no par value.

3) Current Assets include inventory of GH6,600,000 representing goods received from a major supplier on not for sale but display only basis.

4) The fair value of the tangible non-current assets was GH116,000,000.

5) The profit for the current year includes VAT of 17.5% on turnover of GH8,500,000 being invoice amount sold to a customer.

6) The discount rate of Depot Ltd is 10% per annum.

7) Warehouse Ltd, a major competitor of Depot Ltd is listed with a P/E ratio of 9 and dividend yield of 5.2.

8) Profits after tax over the 4 years were as follows;

Required: Compute the value to be placed on the ordinary shares using three methods of valuation and advise the Directors accordingly.

QUESTION 3 Papas Skin Ltd is an Accra-based clothing company owned and managed by its two founders. The company has been selling to only domestic consumers in Ghana since inception. The founders think it is time to extend the operations of the company to foreign markets, particularly those in neighbouring West African countries. Moving into foreign markets requires additional financing and capabilities, which the company does not have. The owners have agreed on ceding 40% stake in their company to a strategic investor who would provide the additional financing and capabilities needed to compete successfully in the international business environment. However, they are not sure of what range of prices to accept for the shares they would give up. Below is a summary of financial data for Papas Skin Ltd for the recent financial year: Issued shares 2,000,000

After-tax profit. GH9,600,000

Total Dividends. GH1,920,000

PPE. GH50,500,000

Current Assets. GH25,300,000

LT Borrowings. GH9,100,000

Current Liabilities. GH11,100,000

The following information are relevant to the position and value of Papas Skin Ltd: 1) The assets of Papas Skin Ltd were valued just after the recent financial statements were published. Inventories and trade receivables, which are included in current assets, were written down by GH80,000 and GH95,000 respectively. Property, plant and equipment were valued at GH52,400,000. 2) Papas Skin Ltd falls into the fabrics and clothing industry. The average P/E ratio for listed equity stocks in the industry is 10. The average required return on listed equity stocks in the industry is 16%. 3) Marketability of shares in Papas Skin Ltd is limited as its equity stock is not listed on the stock exchange. Consequently, investors demand a marketability risk premium of 7% above t he industry average required return on equity in order to invest in the equity stock of Papas Skin Ltd. 4) Earnings and dividends of Papas Skin Ltd are expected to grow by 5% every year to perpetuity. Required: i) Estimate an appropriate required rate of return on the equity stock of the Papas Skin Ltd. ii) Estimate a range of suitable considerations for 40% stake in Papas Skin Ltd using the net assets method, P/E ratio method, and dividend valuation method.