You are on page 1of 10

SOLUTION – CORPORATE REPORTING STRATEGY MAY 2007 QUESTION 1 CH AND RT BANK LTD a) Valuation of shares using Net Asset

Basis at going concern.

Using Net Assets basis of valuing RT Bank Ltd shares, the price per share would be calculated by dividing the Net Assets available to ordinary shares by the total number of shares issued at date of valuation. RT Bank Ltd shares is determined as follows: Cash and balances with Bank Ghana (120,238 + 1,800 x 2) Government securities (176,222 + 853) Due from other banks and financial institutions (124,980 – 1,400) Loans and Advance to customers (348,700 – 5,600 – 1,200) Other Assets (89,590 – 2,300) Property, Plant & Equipment (15,600 x 110%) Goodwill Total Asset taken over Less liabilities taken over Customers Deposits Due to other banks Borrowing Other liabilities (41,438 – 1,209) Net Assets available to equity shareholders Net Assets per share Net Assets available to equity holders Total No. of shares issued at date of valuation ¢m 123,838 177,075 123,580 341,900 87,290 17,160 6,000 876,843 717,279 32,440 38,423 40,229 828,371 48,472

= ¢48,472m 50m

= ¢969.46

The price per share would be quoted at ¢969 per share. This valuation method is useful for merger and acquisition as well as a support for the other valuation basis as an asset backing.

1

472m 50m = ¢m 45.560 3.600 1.000 1. because of the following reasons. Since RT Bank is unquoted company we expect its P/E ratio to be discounted by about 20% to 40% of similar quoted company which is CH Bank Ltd.Alternatively using the shareholders fund approach to value the assets.200 2.500) 6. 1) 2) Lack of market of the RT Bank Ltd shares because it is unquoted Investing in private companies is presumed to be riskier than in quoted companies. The price per share is determined by multiplying the earnings per share of the valuing company to the price earning ratio of similar quoted company or earnings per share divided by the earnings yield of similar quoted company (PCE ratio x EPS) or (EPS/Earnings Yield).142) Understatement of investment ……… Net Assets available to equity Net Asset per share Earnings Yield Basis Earnings yield basis method of valuing share is appropriate basis when valuing for controlling interest and for the purposes of accessing profitability of investment. ¢m Shareholders fund Less: Additional provision for bad debt Penalty given by Bank of Ghana Investment in subsidiary written off Cheques in cause of collection never received written off Add: Goodwill Increase in plant and properties Amount debited in error by Bank of Ghana Over provision of tax (2.351 – 1.400 (10.750 5.46 2 .600 1. = 48. Earnings yield is the reciprocal of the P/E ratio.222 48.472 969.300 1.209 853 13.

10 3 .500 = 15 times 100 If we accept to mark down by 30% then the P/E ratio of RT Bank Ltd would be (70% of 15) = 10.34 50m Alternatively EPS can be calculated by preparing revised profit statement.453 16.200 2.500) 5.600 + 853) 36.600 853 4. EPS = 5.709 (1.809 Less provision for Bad debt (4.500 + 5.567 4.044) 15.567 m ¢91.The earnings per share of RT Bank Ltd is calculated as follows: ¢m 11.300 1.600 1. ¢ Total income (32.100) Profit before tax 5.400 (10.144 + 1.200 + 2.709 Taxation 20% (1.50.567 The P/E ratio is calculated as follows: Market Price per Share Earnings per Share (MPS) (EPS) Where MPS is market price of a share Since CH Bank MPS is ¢1.500 and EPS is ¢100 the P/E ratio is 1.209 Less: Additional Bad debt Penalty by Bank of Ghana Investment written off Cheque for collection written off Adjusted profits Less taxation at 20% Profit available to equity :.142) Profit after tax 4. Therefore the price per share of RT Bank Ltd would be (10.400) (21.600) (10.400 + 3.756 Net profit before tax Add the following Additional Bank of Ghana clearing 3.853 Less operating expenses (16.300 + 1.50 x 91.142) 4.34) = ¢959.

672 2.672 8.498 + 2.650.400 + 32.206 + 38.700 – 100) Less cost of sales (18.120 + 8.000) Total Assets Liabilities Customers deposits (932.744 Cash and balance with Bank of Ghana (150.512 203.922 239.072 134.510 (1.660 2.500 + 17.034) Profit before tax Share of associated before tax (30% x 1.479 105 32.084 51.720 (23.612 + 341.500 155.532) 4.160 + 6.682 (5.017) Other income from sales of shares Les taxation Group (905 + 574) Share of Associated (30% x 351) Profit after tax Less minority interest (W1) Profit transferred to Income Surplus 1. (3.038) 9.580 866.229) Stated capital (86.926 (261) 2.290) Property plant and equipment (28.538 1.949.148 + 123.838) Government securities (291.309 + 40.b) CH BANK LD BALANCE SHEET AFTER ACQUISITION OF RT BANK ¢m 273.090 + 5. General & Admin.423) Other liabilities (61.629 101.794 + 87.584) 2.500 12.150 305 55 4.472) Income surplus Statutory Reserve Fund Shareholders Fund QUESTION 2 OGYAM LTD AND ITS GROUPS CONSOLIDATED PROFIT AND LOSS ACCOUNTS FOR THE YEAR ENDED 30TH JUNE 2006 ¢m Group sales (24.103.103.279) Due to other Banks (49.846 + 177.075) Due from other Bank and financial institutions (116.986 468.440) Borrowings (76.840 114.744 1.900) Other Assets (115.048 – 100) Group gross profit Less selling.786 + 717.665 4 .065 81.000 + 123580) Loans and Advances (524.200 + 48.

854) Debtors (2.276 8. Sales of 25% Investment in Asuo Ltd 25% x 80% = 20% Shareholdings after disposal 5 .160 + 1.332 4.778 (5.051 (360) (540) 4.665 5.140 + 2.086 3.160) Investment in Associated Net Asset x (2.119 WORKINGS Group Accounting SHAREHOLDERS Group .460 (120) 2.Interest Minority Interest Asuo Ltd % 80 20 100 Sab.400 4.105 ¢m 6.232 + 1.332 10.466 + 990 – 40) Cash & Bank (378 + 108 + 40 + 750) Current Liabilities Creditors (1. Masa Ltd % 30 Ass.206 + 522) Sundry Creditors (2.260 -140 + 52) Financed by Stated Capital Income Surplus Minority Interest 1.300 819 7.837 ¢m 2.416 1.718 10.105 9.INCOME SURPLUS ACCOUNTS Balance b/f Goodwill written off Add profit for year Interim Dividend paid Proposed Dividend Balance c/d OGYAM LTD GROUPS CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2006 ¢m Property plant & Equipment (4.505 1.060) 3.837 5.728 3.880 x 30%) Current Assets Stock (2.

044 156.044m .044 104.044*9/12 – 216)} Goodwill at acquisition Goodwill written off Tax Net gain Alternative Sales proceeds Original cost 750 (230) 520 ¢’million 750 (643) 30 (30) .800 + (1.107 (52) 55 Share of post acquisition profits – 25% *80%* balance brought forward 25% *80%*(¢800 million + ¢846 million) 25% *80%* current year profit 25% *80%* ((9/12*1.Asuo Ltd % Group = (80 – 20) 60 Minority Interest 40 100 Minority Interest in P & L A/C 20% from July 1 – 30 March 9 months 40% from 1 April – 30 June 2006 3 months 20% x 9/12 x 1.6 40% x 3/12 x 1.4 Minority Interest 261 Computation of gain to Ogyam Ltd Group on partial disposal.of shareholding in Asuo Ltd.¢216 m) Tax Share of goodwill at acquisition Net gain 329 114 (443) 77 (52) 25 30 55 6 . ¢’ million Sale proceeds Share of net assets at date of disposal – 25% *80% *{846 bf + 1.

350 million respectively liquidation they should have lost all their capital values. ¢’ million Stated capital 80% x ¢1.800 million Income surplus 80% x ¢800 million deficit Net assets acquired Cost Goodwill Goodwill attributable to 25% of its holding sold 25% x ¢120 million 1.000 million and ¢4. This includes debit balance in the Income Surplus accounts.440 (640) 800 920 120 30 QUESTION 3 Suggested re-organisation schemes of Akutu Ltd. 7 c) d) . a) Asset valuation In order to bring the value of the assets to economic productive values the assets of the company has been revalued and all losses written off to capital reduction account or in the determination of the maximum possible as shown in the schedule. b) Intangible and fictitious assets All debit balances and intangible assets have been written off to maximum possible loss to it going concern values. Accounting for maximum capital loss The maximum capital loss was allocated to ordinary shares and preference shares of ¢25. Based on the information available and the attached working schedules the following reconstruction scheme is put forward for consideration by all stakeholders. In addition all surpluses available have been used to reduce the maximum possible loss. The remaining stakeholders will be paid in full to enable them support the scheme. Financing of working capital The existing shareholders and debenture holders have raised funds to pay the outstanding preference creditors the bank loans and the acquisition of computers as well as payment of scheme cost.Computation of goodwill on acquisition of Asuo Ltd.

3.360 27.000 Cash and Bank 1.800 Loan Bank 5.000 4.e) Conclusion We hope all the stakeholders would approve the re-organisation scheme for implementation.000 Computers and Acc.800 29.100 Short term Investment 5.660 Analysis The total amount available to unsecured creditors amounted to 21.980 whiles unsecured creditors is ¢29.060 Distributed as follows Taxation 2.000 800 Fixtures and fittings 2.000 Stock 4.080) Amount available to unsecured creditors 21.300 Motor vehicles 3. 8 .980 Unsecured creditors comprising Trade Creditors 12% Debenture Debenture Interest 14.800 Reconstruction Levy 500 Employees SSF 5. AKUTU LTD WORKING SCHEDULE a) If Akutu Ltd is liquidated the maximum cash available to stakeholders on the realization of the company assets are as follows: ¢m ¢m Land and Buildings 5.300 Furniture and equipment 3. They can only be paid (21.800 Winding up expenses 1.200 (5. since all their interests have been properly assessed and evaluated as the best option available taking into consideration the position of the company.200 Debtors 4.980/29660)74 pesewas per every cedi owed by the company.980 million.860 10. This means that unseen creditors cannot be fully settled in full incase of liquidation.

343) 42.350) 5.000 Debenture interest converted 2.660) 450 (1.000 million to cover all their existing capital and will be called to subscribe for right issue of shares to raise additional capital.000 (8. The shareholders have to bear all the losses because if the company should be liquidated.000 – 4.245 150 520 540 700 (8.680) (2. The balance of ¢4. The remaining stakeholders will have their capital value maintained. they would loose all their capital. the maximum amounts needed to ensure successful re-organisation is calculated as follows: ¢m Goodwill Patent & copyright Development expenditure Land and Building Motor Vehicle Fixtures/Fitting Computer & Acc.000 29.050 9 2. Furniture & Equipment Stock Short Term Investment Provision for Bad Debt Reconstruction expenses Share deals A/C Income surplus Debenture interest Preference Dividend Total maximum loss Allocation of Maximum Loss The ordinary shareholders may be allocated ¢25.400 Ordinary share issued 15. b) If the stakeholders agree to re-organise the company.350 million would be allocated to preference shareholders.500 600 2. ¢m Preference share dividend 1.650 Issue of shares to raise cash 5.000 Preference share capital converted into equity (10. c) Calculation of new Capital regained All stakeholders were to convert their interest into ordinary shares as per the question.350 .The shareholders will receive nothing since the amount available is not enough to cover unseen creditors.038) 1.400) 1.766 (2.000 Net ordinary share capital 29.

800 3.050 5.000 24.000 6.970 4.000 2. Cash and Bank Current Liabilities Trade creditors 12% Debenture Financed By Stated Capital (14.000 13.100) 29.100 20.460 700 2.150 (13.180 AKUTU LTD RECONSTRUCTION BALANCE SHEET Non-current Assets Land and Building Fixture and Fittings Motor Vehicles Computer and Acc.600 2.050 29.000 + 5.000) Less payments Reconstruction expense Taxation Computerization National reconstruction Levy Social Security Fund Bank loan Balance c/d ¢m 1.000 (11.150 42.d) Calculation of Cash Balance Balance as per A/C Issue of Debenture Issue of ordinary shares (15.180 29.860) 14. Furniture and Equipment Patent and copyright Current Assets Stock Debtors Short Term Inv.800 5.360 3.250) 13.000 4.800 800 28.010 ¢ ¢ 10.500 500 580 5.000 10 .