QUESTION ONE
Your client is interested in acquiring a 50% shareholding in the ordinary share capital of ABC ltd a private company.
The following is the latest balance sheet of ABC ltd as at 31 august 1997:
Fixed Assets: shs. Shs.
Freehold property - at cost 555,000
Plant and machinery - cost 1,530,000
Less depreciation to date 450,000 1,080,000
1,635,000
Current Assets
Stock 1,515,000
Debtors 2,055,000
Cash 630,000
4,200,000
Current liabilities
Creditors 2,661000
Taxation 570,000
Proposed dividend 234,000
3,465,000 735,000
Net Asset 2,370,000
Financed by: sh.
Authorized and issued share capital: 450,000
22,500 10% preference shares @ sh. 20 each 450,000
22,500, ordinary shares @ shs. 20 each 900,000
Profit and
loss Account 750,000
1,650,000
12% debentures 2005/10 2,370,000
You are also given the following information
Year ending net profit rate of dividend
Sh. %
1995 810,000 Nil
1996 573,000 25
1997 1,196,250 45
1998 1,350,000 directors forecast
A professional valuation estimated the current market value of freehold property at sh. 930,000. The plant and machinery is considered fairly valued at net book figures. The debentures are secured by a fixed charge. The directors have anticipated that it will be their policy for the foreseeable future to retain 75% of the available profits. The corporation's tax rate is 35%.
Required
Compute a value for the 30% holding in the ordinary shares of the company using :
(i) The dividend yield method. Assume a dividend yield of 20% (gross).
(ii) Net assets basis.
(iii) Price- Earnings ratio basis. Assume a price- Earnings ratio of 2.5
QUESTION TWO
The information below relates to Bidii Ltd, a listed company for the year ended 31st December, 2010
Shs
Purchase of raw materials 10 200 000
Turnover 25 160 000
Salaries and wages 6 800 000
Taxation for the year 2 040 000
Dividends 816 000
Depreciation 1 360 000
Water, power and insurance 2 040 000
Finance charge and leases 680 000
Required
Prepare a net value added statement for the year ended 31st December, 2010.