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Aztec plc has identified Inca Limited as a possible acquisition target. Inca Limited earned €675,000 in pre-tax profits in the most recent reported accounts.
Inca Limited’s most recent SOFP is as follows:
Summary Statement of Financial Position as at 31st March 2020
€000’s
AssetsLand 2,656
Buildings 3,900
Plant 335
Investment – Libyan Investment 200
Office Equipment 34
Total Non-Current Assets 7,125Current Assets
Inventories 285
Trade Receivables 320
Total Current Assets 605Total Assets 7,730
Equity
Issued Share Capital 4,000
Retained Profits 1,150
Equity attributable to the owners of the company 5,150Liabilities
10% Debentures 2028 2,000
Non-current Liabilities 2,000
Trade Payables 174
Bank Overdraft 29
Tax Payable 93
Current Liabilities 284
Total Liabilities 2,580Total Equity & Liabilities 7,730
Appendix 1 continued
Additional information is provided:
• Obsolete inventories included on 31 March 2020 SOFP total €63,000.
• €41,000 of trade receivables are unlikely to be recoverable.
• An independent valuation of Land values it at €2,850,000.
• Contingent liabilities not included on the SOFP total €410,000.
• The investment is a 6-year Libyan Dinar (LD) cash deposit translated at 55 LD = 1 euro.
You have reviewed Aztec plc’s plans for the acquisition. The following points are relevant:
• All assets with the exception of plant will be taken over by Aztec plc.
• Aztec plc will immediately redeem debentures at a premium of 30% to par.
• Aztec plc will close a depot and expects savings of €350,000 pre-tax each year from this closure.
• Aztec plc is capitalised at a multiple of six times post-tax earnings. This will be discounted by 25% for the purpose of valuing Inca Limited.
• Both companies pay corporation tax at 30% and the current exchange rate is 65LD = 1 euro.
Requirement:
The Board of Aztec plc has retained you as an advisor
They have requested that you prepare an earnings and net assets based valuation of Inca Limited.
Say where you have a problem with the answer (but do not expect others to do assignments for you!).
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See right, for net asset valuation how does the corporation tax should be calculated and which part will be affected? and do we do discounting factor on the 6 year period?
Corporation tax is not relevant for the net asset valuation. It is relevant for the PE valuation because you need the after-tax earnings.
There is no discounting required for either valuation. Where the question says that the PE valuation is to be discounted by 25%, it simply means that the value using the PE is to be reduced (i.e. discounted) but 25% (because it is an unquoted company as I explain in my free lectures).
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