VALUATION APPROACHES USED

Income Approach

The financial statement of GIHOC was forecasted for some number of year and the Free Cash Flow (FCF)
method was used. A model was built forecasting GIHOC’s performance for five years. The present value
and cash flows figures for the five forecasted years were then discounted using the prevailing cost of
equity to GIHOC.

Free Cash Flow

Present Value of FCFE 140,549,325
Discount for lack of control
10%
Total Equity GH¢126,494,393

Forecast Assumptions
Revenue Growth
The Company’s revenue was forecasted to grow at a constant rate of 30.34% for business as usual and
21.24% for the downside case. Both the business as usual and the base case was weighted on a 70% and
30% respectively.

Expenses
Cost of sales was also held constant at 75.41% throughout the forecast whereas administrative expense
is expected to grow at an average of 9.92%.

Interest Expense
The Company’s effective interest rate on debt obligations stands at 21.06% and 18.06% for next year
and 15.06% for the rest of the forecasted years.

Capital Expenditure (Capex)

The needed capital expenditure to enable the company continue running its business is 9.79% of sales.

Depreciation and Amortization

The depreciation charge forecasted to be charged on net fixed assets is 6.86%.

Tax Rate
GIHOC is domiciled in Ghana thereby attracting a tax rate of 25% charged on their earnings before taxes
as stipulated in the Internal Revenue Act.

Dividend
A dividend payout ratio of 10.78% on the net earnings of GIHOC was maintained throughout the
forecasted years.
Stated Capital
The stated capital of GIHOC was maintained at GH¢3,050,000 throughout the period forecasted.

Cost of equity
The cost of equity was calculated using the Capital Asset Pricing Model (CAPM). Due to unfledged nature
of our market, the components used in CAPM was obtained from a developed financial market and
adjusted for our market.

Risk-Free Rate
The risk free rate was calculated using current yield rate on the 10-year US government bond. Since the
company’s transaction has a significant proportion of its transactions on the international market, and in
order to achieve some stability in the company forecasted progression over time, the US currency
denominated bond is considered appropriate to this valuation model. The yield is added to the
difference between US inflation and local inflation to arrive at the risk-free rate. The computations
produced a risk-free rate of 18.00%, based on a local inflation rate of 16.9%.

Company Stock Beta

The beta of the company was obtained by calculating an industry beta for the food and beverage
industry and adjusting it to reflect the capital structure of the subject company. The calculated beta
which was adjusted for the capital structure of the company was 1.43.

Market Risk Premium (MRP)

The market risk premium is the difference between the risk free rate and the market return however
data from the Ghanaian market could not be used because of the illiquid nature of the market. MRP
observed in developing countries are usually between 4.5% and 5.5%. Given the underdeveloped nature
of our market we decided to use 5.5% as the market risk premium. Another premium of 10% is placed
on the cost of equity as a measure to cater for the unlisted nature of the proposed equity. The premium
of 10% was added to the cost of equity calculated due to the fact that the subject interest was not listed
on a stock exchange and therefore will have a higher cost of equity which resulted in a cost of equity of
25.86%.

Scenario Analysis
In valuing the equity interest of GIHOC Distilleries Company Limited, we used two scenarios to develop
the forecast of the company’s performance. The scenarios used for Business as usual or Base Case was a
70% probability of occurring and a Downside Case representing a pessimistic view of the future with a
30% probability of occurrence. The revenue was therefore forecasted as a probability weighting of the
growth in revenue in the base case and in the downside case.
 Market Approach
In using the market approach, we selected the Guideline Public Company Method because there were
two food and beverage companies listed and were therefore used as comparable.

The following data was collected on the following comparable:

Guinness Ghana Breweries Limited (GGBL)

2008 2009 2010 2011 2012 2013 2014
Share Price 2.00 1.35 1.56 1.53 2.62 6.20 3.12
Issued Shares 164,671,475 164,671,475 164,671,475 164,671,475 188,005,000 211,338,142 211,338,142
Net Earnings 15,578,000 13,693,000 4,579,000 (4,640,000) 553,000 25,005,000 (8,623,000)
Book Value 59,333,000 54,065,000 45,163,000 45,696,000 138,957,000 152,802,000 140,619,000
Market Value of Equity 329,342,950 222,306,491 256,887,501 251,947,357 492,573,100 1,310,296,480 659,375,003
Market Value of Debt 35,557,000 33,706,000 87,858,000 60,371,000 20,614,000 52,157,000 188,685,000
EBITDA 31,091,000 24,784,000 36,548,000 19,141,000 81,943,000 78,183,000 46,570,000
Sales 135,810,000 200,968,000 206,499,000 244,293,000 292,318,000 321,017,000 330,645,000
All figures are in GH¢

Fan Milk Limited (FML)

2008 2009 2010 2011 2012 2013 2014
Share Price 4.50 5.55 2.45 2.37 3.55 6.22 5.25
Issued Shares 19,784,548 118,707,288 118,707,288 116,207,288 116,207,288 116,207,288 116,207,288
Net Earnings 7,054,000 15,156,000 19,370,000 18,819,000 27,198,000 21,722,00 15,049,000
Book Value 21,410,000 35,082,000 52,126,000 62,372,000 61,681,000 76,431,000 81,021,000
Market Value of Equity 89,030,466 658,825,448 290,832,856 275,411,273 412,535,872 722,809,331 610,088,262
Market Value of Debt - - - - - - -
EBITDA 6,016,000 15,362,000 19,835,000 17,850,000 22,275,000 18,911,000 8,627,000
Sales 55,041,000 82,471,000 103,775,000 109,280,000 147,212,000 138,969,000 177,492,000
All figures are in GH¢

GIHOC Distilleries Company Limited (GIHOC)

2008 2009 2010 2011 2012 2013 2014
Share Price - - - - - - -
Issued Shares - - - - - - -
Net Earnings - - 1,298,975 2,222,485 2,244,976 3,877,840 3,851,678
Book Value - - 8,833,799 10,784,120 12,729,096 14,276,374 18,163,223
Market Value of Equity - - - - - - -
Market Value of Debt - - - - - - -
EBITDA - - 3,941,781 4,005,314 4,524,515 7,317,692 8,983,212
Sales - - 23,539,011 25,996,299 35,755,953 46,597,711 57,381,881
All figures are in GH¢
 MVIC – to – EBITDA
To compute the MVIC-to-EBITDA ratio, the market value of equity was first calculated for all comparable
companies over a five year period. This value was then added to the market value of interest-bearing
debt to arrive at the Market value of Invested Capital (MVIC). The MVIC is divided by Earnings before
Interest, Tax (EBIT), Depreciation and Amortization (EBITDA) ratio was calculated for food and beverage
companies listed on the bourse. The calculated ratio was discounted by 10 percent to for lack of liquidity
(marketability) of the subject interest compared to its comparable. The Market Value of Invested Capital
was obtained for the subject company as the product of the MVIC – to – EBITDA ratio and a forecast of
the subject company’s EBITDA forecast for the next year. To arrive at the value of equity the market
value of the company’s debt was taken out of the MVIC to arrive at the value for equity.

Price-to-Earnings
Similar to the prior method, the price – earnings ratio for the food and beverage industry was computed
by averaging the individual P/E ratios. This average was discounted by 5 percent for Subject Company
having more leverage than the comparable used. The average multiple was multiplied by next year’s
forecast of earnings to obtain market value of the subject company’s equity.

MVIC – to – EBITDA Price – to – Earnings

MVIC – to – EBITDA ratio (Industry average) 15.87% Price – to – Earnings ratio (Industry average)
42.48%
Discount for ratio due to risk 10.00%
Discount for ratio due to risk
Discount multiple value 14.29%
5%

Forecasted EBITDA for next year GH

Discount multiple value 40.70%
¢10.742,461
Earnings for next year GH
Market Value of Invested Capital GH
¢3,205,608
¢153,463,210
Market value of Equity GH
Market value of Debt -
¢130,456,991

Market value of Equity GH¢153,463,210

Valuation Discounts
Discount/premium for risk, growth and profitability
Due to certain specific conditions pertaining to the valuation of the company, some modifications were
made to better represent the characteristics of the equity. The most important are discounts to the
multiples due to the subject company having more risk than the comparable as a result of a higher debt-
to-equity ratio. A 5 percent premium was added to the multiples used because of a higher revenue
growth and a higher profitability than the comparable company. The net result was a discount on the
multiples used in the valuation.

Discount for lack of control and marketability

Valuation of the equity interest in the subject company was done on a minority interest basis which
implies that equity investors who will be taking up equity stakes in the business will not be in control of
the company whether total or partial. In arriving at the final estimate of the value of equity in the
subject company discount 10 percent was taken for a lack of control.

An additional discount was also taken for a lack of marketability which provides for an absence of ready
market for the trading of equity interest. The discount represented 10 percent of the value of the equity
of the subject company.

FAIR MARKET VALUE ANALYSIS

A simple average was taking to obtain the fair market value of GIHOC by estimating the equity using the
discounted cash flow method and the averaging of the calculated discounted free cash flow, price – to –
earnings and MVIC – to – EBITDA market values.

A final discount of 10% was taken to arrive at the final market value of the equity. From the approach,
the final equity market value attained is GH¢120,804,522; we have confidence that this amount
represents a fair market value of the business’s equity.

Equity Value after

Approach Selected Method Equity Value Net Discount
Discounts

Income Based DCF GH¢140,549,325

Market Based MVIC – to – EBITDA GH¢153,463,210

Price – to – Earnings GH¢130,456,991

Average Value GH¢134,227,246

10%
Equity Value

GH¢120,804,522