BUSINESS VALUATION

ILLUSTRATION 1 ON BUSINESS VALUATION

You are employed by Godspower print, a very large printing firm with retail outlets across Nigeria. Its
board is considering making an offer to buy 100% of the shares of Ilabe Startle Limited (ISL), a competitor
of Godspower print in the south east of Nigeria. ISL’s financial year end is 28 February and its most recent
year financial statements are summarized below:

ISL INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2014

N MILLION
REVENUE 17.3
PROFIT BEFORE INTEREST AND TAX 5.9
INTEREST (0.3)
PROFIT BEFORE TAXATION 5.6
CORPORATION TAX AT 21% (1.2)
PROFIT AFTER TAXATION 4.4
DIVIDENDS DECLARED 1.1

ISL STATEMENT OF FINANCIAL POSITION AT 28 FEBRUARY 2014

N MILLION N MILLION N MILLION

NON CURRENT ASSETS
FREEHOLD LAND&BUILDING (Original cost N4.1 3.5
m)
MACHINERY (Original cost N8.8 m) 5.3
8.8
CURRENT ASSETS
INVENTORIES 3.0
RECEIVABLES 0.5
CASH AND BANK 2.8
6.3
CURRENT LIABILITIES
TRADE PAYABLES 3.5
DIVIDENDS 1.1
TAXATION 1.2
(5.8) 0.5
9.3
NON CURRENT LIABILITIES
10% DEBENTURES( REDEEMABLE 2024) (3.0)
6.3
EQUITY
ORDINARY SHARES OF N1 EACH 2.1
RETAINED EARNINGS 4.2
6.3
ADDITIONAL INFORMATION

a. ISL’s management had some of the company’s assets independently revalued in January 2014.
Those values are shown below:

FREEHOLD LAND AND BUILDING 8.3 M NAIRA

MACHINERY 4.1 M NAIRA
INVENTORIES 3.1 M NAIRA
b. The average price/earnings ratio for listed business in the printing industry is 9 and the average
dividend yield is 6% per annum.
c. The cost of equity of business in the printing industry, taking account of the industry average level
of capital gearing is 14% per annum.
d. ISL’s finance department has estimated that the company’s pre-tax net cash inflows (after
interest) for the next four trading years ending 28 February, before taking account of capital
allowances will be

N MILLION
YEAR TO 2015 4.6
YEAR TO 2016 4.3
YEAR TO 2017 5.2
YEAR TO 2018 5.7
▪ ISL’s machinery pool for taxation purposes had a written down value of N3.6 million at 28
February 2014. The pool attracts 18% (reducing balance) tax allowances in every year of
ownership by the company, except the final year. In the final year, the difference between the
machinery’s written down value for tax purpose and its disposal proceeds will be either:
▪ Treated by the company as an additional tax relief, if the disposal proceeds are less than the tax
written – down value or
▪ Be treated as a balancing charge to the company, if the disposal proceeds are more than the tax
written- down value.

You should assume that ISL will not be purchasing or disposing of any machinery in the years 2015 – 2018
and that it would dispose off the existing pool of machinery on 28 February 2018 at its tax written – down
value.

▪ Godspower print’s board estimates that in four years time, i.e. 28 February 2018, it could, if
necessary dispose off ISL for an amount equal to four times its after-tax cash flow (ignoring the
effects of capital allowances and the disposal value of the machinery) for the year to 28 February
2018.
Assume that the corporation tax rate is 21% per annum and paid in the same year it arises.

Requirement

Using the information provided, prepare a report for Godspower print Board which

I. Calculates the value of one share in ISL based on each of these methods
a. Net asset basis (historic cost)
 b. Net asset basis (revalued)
c. Price/earnings ratio
d. Dividend yield
e. Present value of future cash flows
II. Explain the advantages and disadvantages of using each of the five methods in part (a)
above
III. Identify and explain the different methods by which ISL shareholders could be
remunerated for their shares.

ILLUSTRATION 2 ON BUSINESS VALUATION (MAY 2015 ADJUSTED)

The directors of Dangote plc, a large conglomerate, are considering the acquisition of the entire share
capital of Ozone Limited, a private limited company which manufactures a range of engineering
machinery. Neither company has any long term debt capital. The directors of Dangote plc believe that if
Ozone is taken over, the business risk of Dangote will not be affected.

The statement of financial position of OZONE as at 31/07/2013 is expected to be as follows

TOTAL ASSETS N N
NON CURRENT ASSETS (NET OF DEPRECIATION) 1,303,200
CURRENT ASSETS; STOCK AND WIP 1,031,800
RECEIVABLES 1,490,000
BANK 316,200 2,838,000
4,141,200
EQUITY AND LIABILITIES
ISSUED ORDINARY SHARES @ N1 EACH 100,000
DISTRIBUTABLE RESERVES 808,200
SHAREHOLDERS FUND 908,200
PAYABLES 1,507,200
BANK OVERDRAFT 1,725,800 3,233,000
4,141,200

SUMMARISED FINANCIAL RECORD FOR THE FIVE YEARS TO 31/07/2013 IS AS FOLLOWS;

YEAR ENDED 31/07 2009 2010 2011 2012 2013

ESTIMATED
(N)
Profit before extra-ordinary 121,600 276,000 197,600 192,800 212,800
items
Extra ordinary items 11,600 8,800 24,400 39,200 4,000
Profit after extra ordinary 110,000 267,200 173,200 153,600 208,800
items
Dividend 33,000 80,160 51,960 46,080 62,640
Retained earnings 77,000 187,040 121,240 107,520 146,160
The following additional information is available
 I. There have been no changes in the issued share capital of Ozone Limited during the past
five years.
II. The estimated values of Ozone’s non current assets and work in progress as on 31/07/13
are;

REPLACEMENT COST (N) REALISABLE VALUE (N)

NON CURRENT ASSETS 1,450,000 900,000
STOCK AND WIP 1,100,000 1,140,000
III. It is expected that 4% of Ozone Limited receivables as at 31/07/13 will be uncollectable
IV. The cost of capital of Dangote is 12% but the directors of Ozone estimate that the
shareholders of Ozone require a minimum return of 16% per annum from their
investment in the company.
V. The current PE ratio of Dangote is 18. Quoted companies with business activities and
profitability similar to those of Ozone have PE ratios of approximately 12, although these
companies tend to be larger than Ozone.

Requirements

Estimate the value of the total equity of Ozone Limited as on 31 July 2013 using each of the following
bases:

1. Historical basis of net assets valuation

2. Replacement cost
3. Realizable value
4. Gordon dividend growth model
5. PE ratio model

State and justify briefly the approximate range within which the purchase price is likely to be agreed.

ILLUSTRATION 3 ON TERMINAL VALUE

a. Bratim PLC has declared a dividend of 20k per share and has a cost of equity of 15%. What is the
estimated value per share in Bratim, if the dividend is constant for 4 years and then 7% per annum
to infinity thereafter?
b. A company earned N6 per share and paid N3.48 per share as dividend in the previous year. Its
earnings and dividends are expected to grow at 15% for 6 years and then at a rate of 8%
indefinitely. Capitalization rate is 18%. What is the share price today