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ACC401-2023 Business Valuation Tutorials

The Board of Pogas Furniture Ltd is seeking to list the company on the stock exchange. You were asked to determine the company's value as of December 31, 2018 and suggest a range of possible issue prices per share based on the net assets and earnings yield methods. You reviewed the company's unaudited financial statements and identified additional information about sales returns, asset valuations, financial investments, fraud, and taxes. Taking this into account, you redrafted the financial statements and calculated: 1) A net assets value per share of GH¢X using the revised net assets figure. 2) An earnings yield value range of GH¢Y to GH¢Z based on the company's revised

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35 views3 pages

ACC401-2023 Business Valuation Tutorials

The Board of Pogas Furniture Ltd is seeking to list the company on the stock exchange. You were asked to determine the company's value as of December 31, 2018 and suggest a range of possible issue prices per share based on the net assets and earnings yield methods. You reviewed the company's unaudited financial statements and identified additional information about sales returns, asset valuations, financial investments, fraud, and taxes. Taking this into account, you redrafted the financial statements and calculated: 1) A net assets value per share of GH¢X using the revised net assets figure. 2) An earnings yield value range of GH¢Y to GH¢Z based on the company's revised

Uploaded by

Ohene Asare Pogasty
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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UNIVERSITY OF CAPE COAST

COLLEGE OF HUMANITIES AND LEGAL STUDIES


SCHOOL OF BUSINESS
DEPARTMENT OF ACCOUNTING
ADVANCED FINANCIAL REPORTING – BUSINESS VALUATION TUTORIAL QUESTION
Question 1
The Board of Pogas Furniture Ltd (PFC) after few years of incorporation has decided to get the
company listed on the Ghana Stock Exchange. The Board has contacted you to assist in determining
the true value of the business as at 31 December 2018 and to provide a range of possible issue price
based on Net Assets and Earnings Yield. Oliso Ltd, a listed company and a competitor of PFC, current
results show price-earnings ratio of 5 and earnings yield of 20%. The summarised unaudited financial
statements of PFC are as follows:
Statement of profit or Loss for the year ended 31 December 2018
GH¢’000
Sales Revenue (note i) 150,000
Cost of Sales (72,000)
Gross Profit 78,000
Operational Expenses (34,800)
Finance Costs (Interest on debenture stocks) (1,200)
Net Profit 42,000
Taxation (@ 25%) (10,500)
Profit for the period 31,500

Statement of financial position as at 31 December 2018


Assets GH¢’000
Non-current assets (note ii)
Property at Valuation (Land GH¢3 million; buildings GH¢ 27 million) (ii) 30,000
Plant and Equipment (ii) 24,000
Intangible Asset – Patent Right (ii) 3,000
Financial Asset (fair valued through profit or loss at 1/1/2018) (iii) 7,500
64,500
Current Assets (note iv) 30,000
Total Assets 94,500

Equity and Liabilities


Stated Capital (4 million shares issued at GH¢3.00 per share) 12,000
Retained Earnings 57,960
69,960
Non-current liabilities
20% Debenture Stocks (2018-2020) 6,000
Deferred Tax provision -1 January 2018 (note v) 4,500

1
Current liabilities
Trade Payables 3,540
Current Tax liability 10,500
Total Equity and Liabilities 94,500

Your examination of the financial statements and the underlying records revealed the following
additional information:
i) The sales revenue includes GH¢24 million of revenue for credit sales made on a 'sale or return'
basis. At 31 December 2018, customers who had not paid for the goods, had the right to return
GH¢7.8 million of them. PFC applied a markup on cost of 30% on all these sales. In the past, PFC’s
customers have sometimes returned goods under this type of agreement.

ii) The depreciable non-current assets have not been depreciated for the year ended 31
December 2018.
PFC 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 2018 when the buildings had a remaining
life of 18 years. A qualified surveyor has valued the land and buildings at 31 December 2018 at
GH¢33 million.
Plant and equipment are depreciated at 12.5% per annum on the reducing balance basis. As at 31
December 2018, the value in use and the fair value less cost to sell were assessed at GH¢21.3 million
and GH¢20.25 million respectively.
The patent right was acquired in January 2018 at a cost of GH¢3 million. It is expected to be used
for 5 years after which the right of usage would have to be renewed in January
2023.

iii) 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 2018 the relevant index was 240.0 and at 31
December 2018 the index was 259.2

iv) In late December 2018, the directors of PFC discovered a material fraud perpetrated by the company's
credit controller. Investigations revealed that a total of GH¢9 million of the trade receivables (included
in current assets) as shown in the statement of financial position at
31 December 2018 had in fact been paid and the money had been stolen by the credit
controller. An analysis revealed that GH¢3 million had been stolen in the year to 31
December 2017 with the rest being stolen in the current year. PFC is not insured for this loss and
it cannot be recovered from the credit controller since his whereabout is unknown.

v) As at 31 December 2018, the company’s taxable temporary differences had increased to GH¢24
million. The deferred tax relating to the increase in the temporary differences should be taken to profit
or loss. The applicable corporate 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 2018. After allowing for
any adjustments required in items (i) to (iv), the directors have estimated the provision of current tax
liability for 2018 at 25% of adjusted profit. (This is in addition to the deferred tax effects of item (v)).

(Note: Assume that it is about 20% riskier in investing in a non-listed entity (as
compared with a listed entity.)

2
Required
a) Redraft the financial statements above (taking into consideration the additional
information (i)–(v) above.
b) Based on the revised financial statements, provide a range of possible issue prices per
share using Net Assets Method and Earnings Yield/Price Earnings Ratio Method.

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