QUESTION 3

Background

Green Tower Bhd (GTB) is a conglomerate investment company established in Malaysia since 1990. To date, GTB has 10 subsidiaries with diversified industries specialising in construction and property development. The year 2020 certainly did not take off with a good start for the industry, the nation and worldwide. Since February 2020, countries around the globe face the unprecedented economic, health, and financial impact of the COVID-19 global crisis. This event almost certainly bring on new measures, policies and regulations with which GTB must comply to support recovery and future growth of the industry in Malaysia.

Heading new challenge

In 2020, GTB took measures to increase its resilience against market uncertainties and made strategic initiatives to maximise on future opportunities. GTB has been preparing itself to further widen its horizons. The board of GTB has identified a potential acquisition target, Indah Sdn Bhd, located in Alor Setar, Kedah. Indah Sdn Bhd is an unlisted, family-run company that owns and operates commercial buildings since 2010. After several months of discussion and negotiations, the owners of Indah Sdn Bhd expressed interest to sell their business and hope to raise RM60 million for the equity plus another RM18 million to pay off all borrowings. The company reported a total assets value of RM70 million in its recent 2019s statement of financial position. Most of its assets were in cash and equivalents except for property, plant and equipment which had a carrying value of RM50 million as at December 2019. Based on an expert opinion, the value of Indah Sdn Bhds property, plant and equipment could reach up to RM65 million for its land and new buildings are in the centre of Alor Setar township. Careful examination of Indahs book indicated that its current assets included receivables amounted to RM3 million from Swan Sdn Bhd which is undergoing liquidation process. None of this amount can be salvaged. Indah Sdn Bhd has 2 million shares outstanding.

GTB decided to upscale Indah Sdn Bhd to support GTBs new image of eco-friendly building and green sustainable construction. All renovation works will be completed before the launching of the new upgraded building by the end of 2021. To properly determine the fair value of Indah Sdn Bhd, the chief financial controller of GTB prepared a three-year cashflow forecast for Indah Sdn Bhd. He also provided the probability estimates to account for conceivable business risks related to the amount of cashflow attained for the given years. The probability is expected to remain constant at 80% after year 3. The following table presents the relevant cash flow and probability estimates regarding Indah Sdn Bhd:

	Year 0	Year 1	Year 2	Year 3
Total revenues (RM)		60,000,000	75,000,000	94,000,000
Total fixed annual costs (RM)		1,000,000	1,300,000	1,550,000
Total variable cost (RM)		3,000,000	4,500,000	6,000,000
Renovation costs (RM)	50,000,000
Probability of attainment		95%	90%	80%

All revenues and expenses are expected to grow at the historical rates. Net cash flows beyond year 3 is expected to sustain indefinitely. The estimated weighted average cost of capital for GTB is 10% although a similar non-listed company as Indah Sdn Bhd is expected to incur additional premium of 2% for added risks and volatility. The effective tax rate applied to Indah Sdn Bhd remains unchanged at 24% for all years. The following table presents the present value factor for single sum and annuity.

Present Value Table

Period	Single sum			Ordinary annuity
	1%	10%	12%	10%	12%
1	0.990	0.909	0.893	0.909	0.893
2	0.980	0.826	0.797	1.736	1.690
3	0.971	0.751	0.712	2.487	2.402
4	0.961	0.683	0.636	3.170	3.037
5	0.951	0.621	0.567	3.791	3.605
6	0.942	0.564	0.507	4.355	4.111

REQUIRED:

(Round up all final answers to the nearest RM)

1. Calculate the fair value of Indah Sdn Bhd on 1 January 2020 based on the following methods. Round up growth rates to TWO (2) decimal places.

1. Net asset valuation method

(ii) Discounted cash flow method.

2. What is the difference between an entitys principal market and its most advantageous market as discussed in MFRS 13 Fair Value Measurement?