Reference no: EM132049142 , Length: 2 pages

QUESTION ONE

Your client is interested in acquiring a 50% shareholding in the ordinary share capital of ABC ltd a private company.

The following is the latest balance sheet of ABC ltd as at 31 august 1997:

Fixed Assets:                                                              shs.                                Shs.

Freehold property - at cost                                                                               555,000

Plant and machinery - cost                                         1,530,000

Less depreciation to date                                               450,000                    1,080,000

1,635,000

Current Assets

Stock                                                                           1,515,000

Debtors                                                                       2,055,000

Cash                                                                               630,000

                                                                                    4,200,000

Current liabilities

Creditors                                                                     2,661000

Taxation                                                                         570,000

Proposed dividend                                                         234,000

                                                                                    3,465,000                       735,000

Net Asset                                                                                                        2,370,000

Financed by:                                                                                                               sh.

Authorized and issued share capital:                                                                450,000

22,500 10% preference shares @ sh. 20 each                                                    450,000

22,500, ordinary shares @ shs. 20 each                                                             900,000

Profit and

loss Account                                                                                     750,000

                                                                                                                        1,650,000

12% debentures 2005/10                                                                                2,370,000

You are also given the following information

Year ending                            net profit                                 rate of dividend

                                                   Sh.                                           %

1995                                        810,000                                   Nil

1996                                        573,000                                   25

1997                                        1,196,250                                45

1998                                        1,350,000                                directors forecast

A professional valuation estimated the current market value of freehold property at sh. 930,000. The plant and machinery is considered fairly valued at net book figures. The debentures are secured by a fixed charge. The directors have anticipated that it will be their policy for the foreseeable future to retain 75% of the available profits. The corporation's tax rate is 35%.

Required

Compute a value for the 30% holding in the ordinary shares of the company using :
(i) The dividend yield method. Assume a dividend yield of 20% (gross).
(ii) Net assets basis.
(iii) Price- Earnings ratio basis. Assume a price- Earnings ratio of 2.5

QUESTION TWO

The information below relates to Bidii Ltd, a listed company for the year ended 31st December, 2010

                                                                                                         Shs

Purchase of raw materials                                                                   10 200 000

Turnover                                                                                              25 160 000

Salaries and wages                                                                                6 800 000

Taxation for the year                                                                             2 040 000

Dividends                                                                                                816 000

Depreciation                                                                                          1 360 000

Water, power and insurance                                                                 2 040 000

Finance charge and leases                                                                        680 000

Required

Prepare a net value added statement for the year ended 31st December, 2010.