Calculate the possible fair value for product in Market

Assignment Help Financial Accounting

Reference no: EM132743776

Questions -

Q1. Pharmacia Sdn Bhd sells product A in Market 1. The following information relates to the markets available for product A.

	Market 1	Market 2	Market 3
Volume per year	100,000 units	500,000 units	1,000,000 units
Sales Price	5 million	5.5 million	6 million
Transaction costs	0.1 million	0.15 million	0.2 million
Transportation costs	0.1 million	0.15 million	0.1 million

REQUIRED -

(a) Calculate the possible fair value for product A in Market 1, 2 and 3.

(b) Determine the principle market.

(d) If Pharmacia Sdn Bhd is unable to sell in Market 3 given to some restrictions, calculate the fair value of product A.

Q2. The board of directors of Baktii Berhad, a public listed industrial company, are considering making an offer to purchase Dermawan Sdn Bhd, a small and unlisted companies operating in industrial sector. Baktii Bhd shall contine to use Dermawan Sdn Bhd as one of its branch producing the same industrial goods.

Summarised excerpt from the most recent 2017 Financial Position and Profit and Loss Statements for Baktii and Dermawan are shown below:

Baktii Berhad 2017 Dermawan Sdn Bhd 2017

RM million RM million '000 '000

Freehold property 33 460

Plant and Equipment 58 1,310

Inventories 29 330

Receivables 24 290

Cash 3 20

Less current liabilities (31) 25

(518) 122 116 1892

Financed by Ordinary shares, RM0.5 35

Ordinary shares, RM0.25 160

Reserves 43 964

Shareholders' funds 78 1124

Medium term bank loan 38 768

116 1892

The following are the amount of Profit after tax and dividend payment for the last 5 years for both companies:

Year Baktii Berhad Dermawan Sdn Bhd

Profit after Tax(mil) Dividend (mil) Profit after Tax (000) Dividend (000)

2012 14.30 9.01 143 85.0

2013 15.56 9.80 162 93.5

2014 16.93 10.67 151 93.5

2015 18.42 11.60 175 102.8

2016 20.04 12.62 183 113.1

Dermawan Sdn Bhd shares are owned by a small number of private individuals. Its managing director, who receives an annual salary of RM350,000, dominates the company. This amount is RM30,000 more than the average salary received by managing directors of similar companies. The managing director would be replaced if Baktii decided to purchase Dermawan Sdn Bhd.

The freehold property has not been revalued for several years and is believed to have a market value of RM800,000. The value of plant and equipment in the statement of Financial Position is thought to reflect replacement cost fairly, but its value if sold is not likely to exceed RM800,000. Approximately RM55,000 of the inventory is obsolete and could only be sold as scrap for RM5,000.

The ordinary shares of Baktii are currently trading at RM4.30 ex-div. A suitable cost of equity for Dermawan Sdn Bhd has been estimated at 15%. Both companies are subjected to corporation tax of 33%.

REQUIRED -

a) Estimate the value of Dermawan Sdn Bhd. at the end of 2015 using different methods of valuation as follows:

i) Net assets valuation.

ii) Dividend valuation model

iii) P/E or earnings valuation.

b) Advise the board of Baktii Bhd as to how much it should offer for Dermawan Sdn Bhd shares.

Reference no: EM132743776

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