ACCA FM Syllabus F. Business Valuations - Asset Based Valuations - Past Papers ^{1 / 5}

The owners of a private company wish to dispose of their entire investment in the company. The company has an issued share capital of $1m of $0·50 nominal value ordinary shares. The owners have made the following valuations of the company’s assets and liabilities.

The net realisable value of the non-current assets exceeds their book value by $4m. The current assets include $2m of accounts receivable which are thought to be irrecoverable.

What is the minimum price per share which the owners should accept for the company?
A. $14
B. $25
C. $28
D. $13

Ring Co has in issue ordinary shares with a nominal value of $0·25 per share. These shares are traded on an efficient capital market. It is now 20X6 and the company has just paid a dividend of $0·450 per share. Recent dividends of the company are as follows:

Ring Co also has in issue loan notes which are redeemable in seven years’ time at their nominal value of $100 per loan note and which pay interest of 6% per year.

The finance director of Ring Co wishes to determine the value of the company.

Ring Co has a cost of equity of 10% per year and a before-tax cost of debt of 4% per year. The company pays corporation tax of 25% per year.

The finance director of Ring Co has been advised to calculate the net asset value (NAV) of the company.

Which of the following formulae calculates correctly the NAV of Ring Co?

A. Total assets less current liabilities
B. Non-current assets plus net current assets
C. Non-current assets plus current assets less total liabilities
D. Non-current assets less net current assets less non-current liabilities

The shares of GWW Co have a nominal (par) value of 50c per share and a market value of $4·00 per share. The business sector of GWW Co has an average price/earnings ratio of 17 times.

The expected net realisable values of the non-current assets and the inventory are $86·0m and $4·2m, respectively.

In the event of liquidation, only 80% of the trade receivables are expected to be collectible.

Required:
(a) Calculate the value of GWW Co using the following methods:

(ii) net asset value (liquidation basis); and

Note: The total marks will be split equally between each part. (6 marks)

GWW Co is a listed company which is seen as a potential target for acquisition by financial analysts. The value of the company has therefore been a matter of public debate in recent weeks and the following financial information is available:

Statement of financial position information for 2012

The shares of GWW Co have a nominal (par) value of 50c per share and a market value of $4•00 per share. The cost of equity of the company is 9% per year. The business sector of GWW Co has an average price/earnings ratio of 17 times. The 8% bonds are redeemable at nominal (par) value of $100 per bond in seven years’ time and the before-tax cost of debt of GWW Co is 6% per year.

The expected net realisable values of the non-current assets and the inventory are $86•0m and $4•2m, respectively. In the event of liquidation, only 80% of the trade receivables are expected to be collectible.

Required:

Calculate the value of GWW Co using the net asset value (liquidation basis)

Recent financial information relating to Close Co, a stock market listed company, is as follows.

Financial analysts have forecast that the dividends of Close Co will grow in the future at a rate of 4% per year. This is slightly less than the forecast growth rate of the profit after tax (earnings) of the company, which is 5% per year.

The finance director of Close Co thinks that, considering the risk associated with expected earnings growth, an earnings yield of 11% per year can be used for valuation purposes.

Close Co has a cost of equity of 10% per year and a before-tax cost of debt of 7% per year. The 8% bonds will be redeemed at nominal value in six years’ time. Close Co pays tax at an annual rate of 30% per year and the ex-dividend share price of the company is $8·50 per share.

Required:

Calculate the value of Close Co using the net asset value method