QUESTION 1 Medium ltd, a privately owned company, is considering a purchase proposal by Big ltd, a company listed on the Ghana Stock Exchange. The profit and loss account for the year ended 31st December 2019 together with the balance sheet as at that date for Medium ltd is below: Profit and loss account for the year ended 31st December 2019 GHSmillion Profit before tax 10,800 Tax (2,700) Profit after tax 8,100 Proposed dividend (2,500) Retained profit 5,600 Income surplus bal. 1st January 2005 6,400 Income surplus bal. 31 December 2005 12,000 Balance sheet as at 31 December 2005 Fixed assets 38,030 Investments 12,600 Stocks 8,360 Debtors 6,450 Bank and cash 3,250 Creditors and accruals (6,350) Tax (1,540) Bank overdraft (5,000) Dividend (1,700) 20% debentures (10,000) 44,100 Stated capital: 5,000,000 ordinary shares 15,000 2,000,000 15% preference shares 8,000 Income surplus 12,000 Capital surplus 3,420 Share deals 5,680 44,100 Additional information i. Medium ltd has an employee share ownership scheme which is run by trustees with rules which prevent transfer of the Schemes assets to the company. Medium ltd is required to transfer 10% of its pre-tax profits to the scheme each year. The amount due for 2019 is yet to be transferred and the Schemes assets amounting to GHS7,300 million is included in the investments of Medium ltd. ii. The cost of Medium ltds investment is GHS3,600 million but is included in the above balance sheet at its current market value. Recent investigation has shown that its current market value has declined by GHS2,000 million. iii. Included in debtors of Medium ltd is an amount of GHS5,350 million due from Sanyo ltd, a major customer. Sanyo ltd has disputed the balance since 2013 on grounds that goods worth GHS3,850 million purported to have been supplied in 2012 were never received. Sanyo ltd also contended that payments made to Medium ltd amounting to GHS 1,260 million were not credited to its account. iv. Fixed assets of Medium ltd include goodwill of GHS3,500m considered worthless. It also includes GHS2,500m paid for patents. The patents represent a right to trade in a special product which is expected to generate cash flows of GHS950 million per annum indefinitely. v. The cost of capital of Medium ltd is 20% and the discounted present value of future cash payment in respect of the debentures is GHS13,200. vi. The following projections were obtained from a five year corporate strategy document of Medium ltd: Year net cash flows depreciation GHSmillion GHSmillion 2006 5,200 1,020 2007 7,000 1,500 2008 6,400 2,300 2009 8,500 2,450 2010 10,200 2,700 Cash flows are assumed to accrue at the end of each financial year. vii. Land and buildings is included in fixed assets of Medium ltd at its carrying amount of GHS4,300 million. This has been revalued at GHS6,800 million by independent valuers for purpose of the impending sale of the company to Big ltd. viii. The fair value of the remaining tangible fixed assets of Medium ltd is GHS27,500 million. During the annual stock take in 2019 closing stock of Medium ltd was understated by GHS4,700 million. This error has not been rectified. ix. The price earnings ratio and dividend yield of Big ltd and other quoted companies in the same industrial sector in which Medium ltd operates are 18 and 7.5% respectively. x. Debenture interest has been paid in full but 40% of preference dividend for 2019 is outstanding. xi. Corporate tax provision for 2019 is expected to reduce by GHS500 million due to effects of stocks, bad debts and goodwill adjustments. xii. The present value of GHS1.00 at a discount rate of 20% is as follows: Year Discount factor 0 1.0000 1 0.8333 2 0.6944 3 0.5789 4 0.4823 5 0.4019 6 0.3349 Required: Determine the value to be placed on the shares of Medium ltd using any three methods of valuation as far as the information given permits. [25 MARKS]