Question Tag: Market Value

Search 500 + past questions and counting.
Professional Bodies Filter
Program Filters
Subject Filters
More
Tags Filter
More
Check Box – Levels
Series Filter
More
Topics Filter
More
  • 10 Marks

AFM – May 2016 – L3 – Q3a – Valuation of acquisitions and mergers, Acquisitions and mergers versus other growth strategies

Calculate pre-acquisition market values of two companies and determine the maximum price for an acquisition.

a) Plainview Farms Limited is considering acquiring Cottage Industries Limited. The extracts of the financial statements of the two companies are as follows:

Statement of Financial Position

Plainview Farms Ltd (GH¢’m) Cottage Industries Ltd (GH¢’m)
Net Assets 6,300 1,892
Equity Capital 2,000 1,000
Income Surplus 4,300 892

Income Statement

Plainview Farms Ltd (GH¢’m) Cottage Industries Ltd (GH¢’m)
Profit after tax 800 300
Dividend (600) (100)
Retained earnings 200 200

The two companies retain the same proportion of profits each year, and this is expected to continue in the future. Plainview Farms Limited’s return on investment is 16%, while Cottage Industries Limited’s is 21%. One year after the post-acquisition period, Plainview Farms will retain 60% of its earnings and expects to earn a return of 20% on new investment.

The dividends of both companies have been paid. The required rate of return for ordinary shareholders of Plainview Farms Limited is 12%, and for Cottage Industries Limited it is 18%. After the acquisition, the required rate of return will become 16%.

Required:
i) Calculate the pre-acquisition market values of both companies. (5 marks)
ii) Calculate the maximum price Plainview Farms Limited will pay for Cottage Industries Limited. (5 marks)

  • 9 Marks

PSAF – Nov 2020 – L2 – Q1c – General purpose financial reporting framework

This question discusses various measurement bases used in public sector financial reporting and their impact on reflecting the cost of service, operational capacity, and financial capacity.

According to the Conceptual Framework for General Purpose Financial Reports (GPFR), the objective of measurement in financial reporting in public sector entities is to select those measurement bases that most fairly reflect the cost of services, operational capacity, and financial capacity of the entity in a manner that is useful for accountability and decision-making purposes.

Required: Explain the under listed bases and discuss the extent to which each measurement reflects the cost of service, operational capacity, and financial capacity of an entity.

i) Historical cost

ii) Market Value

iii) Replacement cost

i) Historical Cost:

  • Explanation: The consideration given to acquire or develop an asset, reflecting the original acquisition cost.
  • Reflection:
    • Cost of Service: Shows the resources expended to acquire assets used in service provision.
    • Operational Capacity: Reflects the resources available for future service provision based on original cost.
    • Financial Capacity: Indicates the value of assets that could serve as security against borrowing.

ii) Market Value:

  • Explanation: The amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.
  • Reflection:
    • Cost of Service: Reflects asset consumption based on current market values.
    • Operational Capacity: Shows the current market value of assets available for future service delivery.
    • Financial Capacity: Indicates the potential sale value of assets.

iii) Replacement Cost:

  • Explanation: The most economic cost required to replace the service potential of an asset at the reporting date.
  • Reflection:
    • Cost of Service: Equivalent to the service potential sacrificed.
    • Operational Capacity: Focuses on the current value and service potential of assets.
    • Financial Capacity: Does not reflect financial capacity as it does not indicate sale value.
  • 14 Marks

FM – March 2023 – L2 – Q2a – Mergers and acquisitions

Calculate the combined company's EPS, weighted average P/E ratio, market value per share, total market capitalization, and the premium received by Finkyim Ltd.

Panpana Ltd is operating in the same industry as Finkyim Ltd, but Finkyim Ltd is experiencing leadership crisis leading to poor performance. Panpana Ltd, upon realizing this, is putting up a bid to take over Finkyim Ltd. It has been agreed that Panpana Ltd will pay 0.7 of its own shares for each of the shares in Finkyim Ltd. This acquisition has no economies of scale and operating synergy. The relevant financial data of the two companies are as follows:

Panpana Ltd Finkyim Ltd
Net Sales GH¢503,000 GH¢178,000
Profit After Tax GH¢88,000 GH¢18,000
Number of Shares 18,000 4,500
Price per Share GH¢50 GH¢30
Price-Earnings (P/E) Ratio 10 8

Required:
i) Calculate the Earnings per Share (EPS) for the combined company. (3 marks)
ii) Calculate the Weighted Average P/E ratio for the combined company. (3 marks)
iii) Calculate the Market Value per Share for the combined company. (2 marks)
iv) Calculate the Total Market Capitalization for the combined company. (2 marks)
v) Calculate the Premium received by Finkyim Ltd. (4 marks)

i) Earnings per Share (EPS):
= GH¢5.01

ii) Weighted Average P/E Ratio:
Weighted Average P/E Ratio =

iii) Market Value per Share:

iv) Total Market Capitalization:

v) Premium Received by Finkyim Ltd:
Value before merger = 4,500 × 30 = GH¢135,000
Value after merger = (0.7 × 4,500) × 48.45 = GH¢152,618
Premium Received = 152,618 − 135,000 = GH¢17,618

 

  • 20 Marks

FM – MAR 2024 – L2 – Q2 – Mergers and acquisitions

This question focuses on calculating the share exchange ratio, the market value, EPS, and P/E ratio of a combined business after acquisition, and discusses defensive tactics that can be used to prevent a hostile takeover.

Olongon Plc (Olongon) and Kwatrikwa Plc (Kwatrikwa) are competitors listed on the Ghana Stock Exchange. Due to poor managerial decisions, Kwatrikwa’s earning power has been uncertain in recent years, making shareholders contemplate selling the business. However, the management of Kwatrikwa has used various defensive tactics to block any takeover they perceive to be hostile. In the just-ended Annual General Meeting (AGM), Kwatrikwa’s shareholders resolved to sell the company. Shareholders of Olongon have expressed interest in acquiring Kwatrikwa and have suggested to the board to put a proposal together for consideration in the next extraordinary meeting. Olongon’s board has gathered the information below to guide the drafting of the proposal:

Company Olongon Kwatrikwa
Earnings per share (GH¢) 0.50 0.50
Retention ratio 0.60 0.40
Price per share (GH¢) 10.00 5.00
Number of shares 25,000 25,000

Required:

a) Assuming the acquisition will be financed with shares, how many shares of Olongon should be exchanged for all the shares of Kwatrikwa based on market value?
(4 marks)

b) Assuming the share price of the combined business after the acquisition is the same as the share price of Olongon, calculate the market value, earnings per share, and the Price/Earnings ratio of the combined business.
(6 marks)

c) Calculate the cost of the acquisition if Olongon pays GH¢130,000 in cash for Kwatrikwa.
(2 marks)

d) Explain FOUR (4) defensive tactics the management of Kwatrikwa can employ to prevent Olongon from acquiring the company.
(8 marks)

a) Shares of Olongon that should be exchanged for all the share of Kwatrikwa

b) Value of the combined business using the following:

  • 𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 = 𝑇𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑓 𝑐𝑜𝑚𝑏𝑖𝑛𝑒𝑑 𝑏𝑢𝑠𝑖𝑛𝑒𝑠𝑠 × 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
    𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 = (25,000 + 12,500) × 10 = 𝑮𝑯𝑺𝟑𝟕𝟓, 𝟎𝟎𝟎

𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑜𝑓 𝑐𝑜𝑚𝑏𝑖𝑛𝑒𝑑 𝑏𝑢𝑠𝑖𝑛𝑒𝑠𝑠 = (0.5 × 25,000) + (0.5 × 25,000) = 𝐺𝐻𝑆25,000

 

 

c) Cost of the acquisition if Olongon pays GH¢130,000 in cash for Kwatrikwa.
Cost of Acquisition = Cash paid – Value of Target (Kwatrikwa)
Cost of Acquisition = 130,000 – 125,000 = GH¢5,000
The acquisition is good for Kwatrikwa’s shareholders, they can gain GH¢5,000 for
free.

d) Defensive tactics the management of Kwatrikwa can employ to prevent Olongon
from acquiring the company.

  • Staggered board: The board is classified into three equal groups. Only one group
    is elected each year. Therefore, the bidder cannot gain control of the target
    immediately.
  • Supermajority: A high percentage of shares, typically 80%, is needed to approve
    a merger.
  • Fair price: Mergers are restricted unless a fair price (determined by formula or
    appraisal) is paid.
  • Restricted voting: Shareholders who acquire more than a specified proportion of
    the target have no voting rights unless approved by the target’s board.
  • Waiting period: Unwelcome acquirers must wait for a specified number of years
    before they can complete the merger.
  • Poison pill: Existing shareholders are issued rights that, if there is a significant
    purchase of shares by a bidder, can be used to purchase additional stock in the
    company at a bargain price.
  • Poison put: Existing bondholders can demand repayment if there is a change of
    control as a result of a hostile takeover.
  • Litigation: Target files suit against bidder for violating antitrust or securities laws.
  • Asset restructuring: Target buys assets that bidder does not want or that will
    create an antitrust problem.
  • Liability restructuring: Target issues shares to a friendly third party, increases the
    number of shareholders, or repurchases shares from existing shareholders at a
    premium.
  • Crown jewels: Crown jewels are options under which a favored party can buy a
    key part of the target at a price that may be less than its market value.
  • Golden parachutes: Golden parachutes are additional compensations to the
    target’s top management in the case of termination of its employment following a
    successful hostile acquisition.

 

Take control of your business data with insight and in-depth understanding by taking this course. 

Services

Contact Info

  • +233203701923
    +233543919232
  • info@noohrabusiness.com

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope