(a) Book value – historical or balance sheet value
Book value of an asset is determined using the net asset basis/liquidating method
where, the value of a share i.e
Value of a share = Net worth (equity)___ = Total Assets – Total Liabilities
No. of ordinary shares No. of ordinary shares
The main weakness of the book value valuation is that the data used is historical.
Replacement Value:
Its based on the cost of replacing the existing assets. However, only the productive
fixed assets can be replaced at ago since current assets are circulating working capital.
Replacement value = Replacement Cost of Fixed assets
No. of ordinary shares
The problems with this value are:
(i) It is based on one portion of total assets.
(ii) Replacement value is subjectively determined.
Substitution value
This involves determining the value of a security by looking at the value of a
similar/substitute value of a share of a competitor company in the same industry.
The problems with this value are:-
(i) Firms do not have similar productive assets for the purpose of using one
security as a substitute of the other.
(ii) There are no two firms which are identical or similar in their operating
characteristics e.g firms in the same industry will have different accounting
policies and management styles.
Intrinsic Value
It's the value determined using historical information and financial models
e.g the dividend yield model.
The problems with this value are:
(i) It is based on historical data.
(ii) The models may not be accurate in fact different models produce
different intrinsic values.
marto answered the question on February 11, 2019 at 07:17
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substantially all her terminal benefits in the shares of ABC Ltd., a...(Solved)
Three years ago, Mrs. Rehema Waziri was retrenched from the Civil Service. She invested substantially all her terminal benefits in the shares of ABC Ltd., a company quoted on the stock exchange. The dividend payments from this investment makes up a significant position of Mrs Waziri's income. She was alarmed when ABC Ltd. dropped its year 2001 dividend to Sh.1.25 per share from Sh.1.75 per share which it had paid in the previous two years. Mrs Waziri has approached you for advice and you have gathered the information given below regarding the financial condition of ABC Ltd. and the finance sector as a whole.
Notes:
1. Industry ratios have been roughly constant for the past four years.
2. Inventory turnover, total assets turnover and fixed assets turnover are based on the year-end balance sheet figures.
Required:
(a) The financial ratios for ABC Ltd for the past three years corresponding to industry ratios given above.
(b) Arrange the ratios calculated in (a) above in columnar form and summarize the strengths and weaknesses revealed by these ratios based on:
(i) Trends in the firm's ratios
(ii) Comparison with industry averages.
(The summary should focus on the liquidity, profitability and turnover ratios).
Date posted: February 8, 2019. Answers (1)
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Magharibi Cane Millers Ltd. is a company engaged in the pressing and processing of sugar cane
juice into refined sugar. For some time, the company has been considering the replacement of
its three existing machines.
The production manager has learnt from a professional newsletter on sugar of the availability of
a new and larger machine whose capacity is such that it can produce the same level of output per
annum currently produced by the three machines. Furthermore, the new machine would cut
down on the wastage of juice during processing. If the old machines are not replaced, an
extraordinary overhaul would be immediately necessary in order to maintain them in operational
condition. This overhaul would at present cost Sh.5,000,000 in total.
The following additional information is available:
Required:
(a) (i)Net present values of the proposed replacement decision using discount rates
of 10% and 20%.
(ii) The estimated internal rate of return (IRR) of the replacement decision using
the values determined in (i) above.
(iii) Advice management on the proposal based on your answer in (ii) above.
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These...(Solved)
Multi-Link Ltd., a trading company, currently has negligible cash holdings but expects
to make a series of cash payments totaling Sh.150 million over the forthcoming year.
These payments will become due at a steady rate. Two alternative ways have been
suggested of meeting these obligations.
Alternative I
The company can make periodic sales from existing holdings of short-term securities.
The average percentage rate of return on these securities is 12 over the forthcoming
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Sh.15,000. The proceeds from the sale of the securities are placed on short-term deposit
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also imposes a flat arrangement fee of Sh.50,000 which would be met out of existing
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drawn down at no cost as and when required. Multi-Link Ltd.'s treasurer believes that
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Date posted: February 8, 2019. Answers (1)
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Required:
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(i) determine the best credit policy for its customers
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The following data have been collected to assist in making the decisions:
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6. Sales are expected to increase by 20% if the credit terms are relaxed and to
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7. 60% of sales are on credit.
8. The gross margin on sales is 30% and is to be maintained in future.
FINANCIAL
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Date posted: February 8, 2019. Answers (1)
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Date posted: February 8, 2019. Answers (1)
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