Question 2 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 yiell 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 (notei) 100,000 Cost of sales (48,000) Gross Profit 52,000 Operational Expenses (23,200) Finance costs (Interest on debenture stocks) (800) Net Profit Taxation (@ 25%) 28,000 (7,000) Profit for the period 21.000 GHS'000 Statement of financial position as at 31 December 2020 ASSETS Non-current assets (note it) Property at valuation (Land GHS 2 m: buildings GHS 18m) (i) Plant and equipment (i) Intangible Asset - Patent Right (1) Financial asset (fair valued through profit or loss at 1/1/2020) (i) 20,000 16,000 2.000 5.000 Current Assets (note iv) 43,000 20,000 63,000 Total Assets EQUITY AND LIABILIES Stated Capital (4 million shares issued at GHS2.00 per share) Retained Earnings 8.000 38,640 46,640 Non-current liabilities 20% Debenture Stocks (2020-2025) (note v) Deferred Tax provision - 1 January 2020 (note vi) 4,000 3,000 Current liabilities Trade Payables Current Tax liability 2,360 7.000 we 63,000 Total Equity and Liabilities 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 GHS 16 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. (1) 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. 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 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 GHS 12.36 million were paid. These have been correctly accounted for in the above financial statements. The comparative figure for the previous year (2019) was GHS 12 million. The dividend growth rate achieved in 2020 is expected to be sustained in the years ahead Required Re draft the financial statements above (taking into consideration the additional information (1)-(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. Question 2 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 yiell 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 (notei) 100,000 Cost of sales (48,000) Gross Profit 52,000 Operational Expenses (23,200) Finance costs (Interest on debenture stocks) (800) Net Profit Taxation (@ 25%) 28,000 (7,000) Profit for the period 21.000 GHS'000 Statement of financial position as at 31 December 2020 ASSETS Non-current assets (note it) Property at valuation (Land GHS 2 m: buildings GHS 18m) (i) Plant and equipment (i) Intangible Asset - Patent Right (1) Financial asset (fair valued through profit or loss at 1/1/2020) (i) 20,000 16,000 2.000 5.000 Current Assets (note iv) 43,000 20,000 63,000 Total Assets EQUITY AND LIABILIES Stated Capital (4 million shares issued at GHS2.00 per share) Retained Earnings 8.000 38,640 46,640 Non-current liabilities 20% Debenture Stocks (2020-2025) (note v) Deferred Tax provision - 1 January 2020 (note vi) 4,000 3,000 Current liabilities Trade Payables Current Tax liability 2,360 7.000 we 63,000 Total Equity and Liabilities 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 GHS 16 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. (1) 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. 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 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 GHS 12.36 million were paid. These have been correctly accounted for in the above financial statements. The comparative figure for the previous year (2019) was GHS 12 million. The dividend growth rate achieved in 2020 is expected to be sustained in the years ahead Required Re draft the financial statements above (taking into consideration the additional information (1)-(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