Question

QUESTION 2:

S.B.Consult Ltd, recognized as the leader in hospital supplies, has received an invitation to supply FBC, ECG, and dental machines to Justab Hospital in Kasoa. The contract will be for 10 years, and management is considering appraising the investment to enable them present their proposals for the contract. The following information was extracted from the recently published accounts of S.B. Consult Ltd.

GH¢ ‘000
Equity Shares (1,000,000 shares)	70,000
15% Preference shares	50,000
10% (Bonds irredeemable)	30,000
Total	150,000

The Treasury unit of S.B.Consult Ltd has estimated that it will require GH¢ 10 million to finance the new project. The total amount would be raised through 10% Irredeemable bonds at the current market price. The cost of Preference shares and Bonds will not change but equity shareholders will demand an increase of 20% on the current cost of equity.

S.B.Consult Ltd has a beta of 0.8, the market risk premium for the steel industry is 6.25%, and the Government of Ghana Bond rate is 20%. The current market price for Irredeemable Bonds of GH¢1,000 nominal value is GH¢850.

S.B. Consult Ltd’s dividend policy is to pay constant dividend and this policy will not change into the foreseeable future. The recent dividend paid was GH¢20 per share. S.B. Consult Ltd is a Free Zones Company and therefore pays tax at a rate of 8%.

Required:

i) Calculate the current market capitalization of S.B. Consult Ltd.                    

(Hint: ?=??+ ? (??−??))

QUESTION 3:

Boateng Plaza Ltd, a hotel leisure company, is currently considering taking over a smaller private limited company, Badin Ltd. The board of Boateng Plaza is in the process of making a bid for Badin Ltd but first needs to place a value on the company.

Boateng Plaza has gathered the following data:

Year	2011	2012	2013	2014
GH¢		GH¢	GH¢	GH¢
Profit after tax	6,000,000	6,200,000	6,300,000	6,300,000

The company’s earnings yield is 12%.

Required:

i) As a Finance Manager, calculate the value of the company based on the present value of expected earnings.                                                                                                            

ii) Explain THREE problems associated with using P/E method for valuing firms.           

It's a complete question, Sir

Answer 1

Ques.-2

Market capitalisation= No.of equity shares outstanding*Price per share

To find the price per share , given the recent dividend of GHC 20 per share ,

we will find the cost of equity as per CAPM,

ke=RFR+(Beta*Risk premium)

ie.ke=20%+(0.8*6.25%)=

25%

Now, given that the

equity shareholders will demand an increase of 20% on the current cost of equity

the current cost of equity will be 25%*(1+20%)=

30.0%

Now, under constant dividends,with no change in the foreseeable future,

New Cost of equity= $ dividends/Market price per share

ie. 30%=20/MPS

so, MPS=20/30%=

66.67

So,

Market capitalisation= No.of equity shares outstanding*Price per share

ie. 1000000 shares* $ 66.67=

66670000

(ANSWER)

Ques.-3

i. Value of the company based on PV of expected earnings=

(6000000/1.12^1)+(6200000/1.12^2)+(6300000/1.12^3)+(6300000/1.12^4)=

18787724.35

ii) THREE problems associated with using P/E method for valuing firms.

1.Earnings include accrued income and are not cash earnings--so we may not know how much of the earnings hav ebeen realised in cash.

2. We generally assume that this P/E or earnings are going to continue for atleast another 10 years, which may not be the actual case.

3. Just with one P/E ratio , we may not be able to tell about the pattern, ie. No.of years this ratio has been achieved.