(b)

Temilade Limited RA RB RP = = = = = (0.24) (0.3) (0.12) (0.6) (0.6)R.A 0.6(0.171) 0.1526 + + + + = (0.15) (0.5) (0.13) (0.3) (0.4) RB 0.4 (0.125) 15.26% + + (0.12) (0.2) (0.14) (0.1) = = 0.171 0.125

SOLUTION 3 (a) Net assets valuation Fixed assets revalued Investments Stocks Debtors Cash N 140,000 15,000 2,000 6,000 4,000 167,000 N 4,000 6,000

Current liabilities Trade creditors Corporation tax

10,000 157,000

Valued of ordinary shares on net asset basis: = N157,000 100,000=N1.57 (II) The dividend on the normal value of shares = N5,000 100,000 = 5 Pence per share Dividend yield = DPS = 5p = 4% for similar MPS MPS MPS = N1.25 (III) EPS = (Earning after tax + Investment income) Number of shares = N22,000 100,000 shares = 22p/share PE ratio = MPS = MPS =14 for similar companies EPS 22p MPS = 308 pence Net assets plus goodwill basis =N= 157,000 Net assets (as revalued) =N= NPV of future profits per Year plus investment 6

SOTE TWAWEZA 2012

Income

30,000 2,500 32,500

Less minimum accepted Return on net assets at 10%, 0.1 x N157, 000 Super profit p.a. Super-profits capitalised at 15%, #16,800 0.15 Thus goodwill

15,000 16,800 112,000

112,000 N269,000

Value of ordinary share = N269,000 100, 000 shares = N2.6 (i) Does not take earnings of company into account. Does not take goodwill of company into account. Market prices are not considered. (ii) Does not take into account the earnings as distinct from the dividend of company. Market prices do not always bear any relationship to the value of the company. Goodwill is ignored. Current earnings are not considered. Does not consider current earnings of the company. Similar to second and third points under (b) (i). Does not take into account anomalies mentioned above. Goodwill is difficult to evaluate. It is apparent that the location and condition of the fixed asset of donning ton enterprises have been investigated, but this should be confirmed. The basis of revaluation, depreciation policy and the qualification of values should be ascertained. The fixed asset register should be checked and a search conducted to see if any of the fixed assets have a lien or charge imposed upon them, although this not apparent from the summary balance sheet. The location, condition and method of stock valuation should also be confirmed. Debtors should be investigated, particular attention should be given to an age analysis to review the possibility of bad debts. Balance sheets and operating statement should be reviewed over say the past five years noting how the company has developed. Particular attention should be given to analysing the performance of the company over this period and careful note should be taken of the suitability of accounting policies adopted. Independent reference to the companys suppliers and clients should be made to confirm the companys operational and financial standings. References could also be obtained from the companys banker and other sources such as dun and brad street or Extel. As a result of obtaining control over a small company such as Donnington, it is perhaps the better view that more attention be paid to the valuations of shares on an earnings and goodwill basis 7

(C)

SOTE TWAWEZA 2012