SOLUTION CORPORATE REPORTING STRATEGY MAY 2007 QUESTION 1 CH AND RT BANK LTD a) Valuation of shares using Net Asset

t Basis at going concern.

Using Net Assets basis of valuing RT Bank Ltd shares, the price per share would be calculated by dividing the Net Assets available to ordinary shares by the total number of shares issued at date of valuation. RT Bank Ltd shares is determined as follows: Cash and balances with Bank Ghana (120,238 + 1,800 x 2) Government securities (176,222 + 853) Due from other banks and financial institutions (124,980 1,400) Loans and Advance to customers (348,700 5,600 1,200) Other Assets (89,590 2,300) Property, Plant & Equipment (15,600 x 110%) Goodwill Total Asset taken over Less liabilities taken over Customers Deposits Due to other banks Borrowing Other liabilities (41,438 1,209) Net Assets available to equity shareholders Net Assets per share Net Assets available to equity holders Total No. of shares issued at date of valuation m 123,838 177,075 123,580 341,900 87,290 17,160 6,000 876,843 717,279 32,440 38,423 40,229 828,371 48,472

= 48,472m 50m

= 969.46

The price per share would be quoted at 969 per share. This valuation method is useful for merger and acquisition as well as a support for the other valuation basis as an asset backing.

Alternatively using the shareholders fund approach to value the assets. m Shareholders fund Less: Additional provision for bad debt Penalty given by Bank of Ghana Investment in subsidiary written off Cheques in cause of collection never received written off Add: Goodwill Increase in plant and properties Amount debited in error by Bank of Ghana Over provision of tax (2,351 1,142) Understatement of investment Net Assets available to equity Net Asset per share Earnings Yield Basis Earnings yield basis method of valuing share is appropriate basis when valuing for controlling interest and for the purposes of accessing profitability of investment. The price per share is determined by multiplying the earnings per share of the valuing company to the price earning ratio of similar quoted company or earnings per share divided by the earnings yield of similar quoted company (PCE ratio x EPS) or (EPS/Earnings Yield). Earnings yield is the reciprocal of the P/E ratio. Since RT Bank is unquoted company we expect its P/E ratio to be discounted by about 20% to 40% of similar quoted company which is CH Bank Ltd, because of the following reasons; 1) 2) Lack of market of the RT Bank Ltd shares because it is unquoted Investing in private companies is presumed to be riskier than in quoted companies. = 48,472m 50m = m 45,750 5,600 1,200 2,300 1,400 (10,500) 6,000 1,560 3,600 1,209 853 13,222 48,472 969.46

The earnings per share of RT Bank Ltd is calculated as follows: m 11,756

Net profit before tax Add the following Additional Bank of Ghana clearing 3,600 853

4,453 16,209 Less: Additional Bad debt Penalty by Bank of Ghana Investment written off Cheque for collection written off Adjusted profits Less taxation at 20% Profit available to equity :. EPS = 5,600 1,200 2,300 1,400 (10,500) 5,709 (1,142) 4,567

4,567 m 91.34 50m Alternatively EPS can be calculated by preparing revised profit statement. Total income (32,400 + 3,600 + 853) 36,853 Less operating expenses (16,144 + 1,200 + 2,300 + 1,400) (21,044) 15,809 Less provision for Bad debt (4,500 + 5,600) (10,100) Profit before tax 5,709 Taxation 20% (1,142) Profit after tax 4,567 The P/E ratio is calculated as follows: Market Price per Share Earnings per Share (MPS) (EPS)

Where MPS is market price of a share Since CH Bank MPS is 1,500 and EPS is 100 the P/E ratio is

1,500 = 15 times 100

If we accept to mark down by 30% then the P/E ratio of RT Bank Ltd would be (70% of 15) = 10.50. Therefore the price per share of RT Bank Ltd would be (10.50 x 91.34) = 959.10

b)

CH BANK LD BALANCE SHEET AFTER ACQUISITION OF RT BANK m 273,986 468,922 239,580 866,512 203,084 51,660 2,103,744 1,650,065 81,840 114,629 101,538 1,949,072 134,672 8,500 12,500 155,672 2,103,744

Cash and balance with Bank of Ghana (150,148 + 123,838) Government securities (291,846 + 177,075) Due from other Bank and financial institutions (116,000 + 123580) Loans and Advances (524,612 + 341,900) Other Assets (115,794 + 87,290) Property plant and equipment (28,500 + 17,160 + 6,000) Total Assets Liabilities Customers deposits (932,786 + 717,279) Due to other Banks (49,400 + 32,440) Borrowings (76,206 + 38,423) Other liabilities (61,309 + 40,229) Stated capital (86,200 + 48,472) Income surplus Statutory Reserve Fund Shareholders Fund

QUESTION 2 OGYAM LTD AND ITS GROUPS CONSOLIDATED PROFIT AND LOSS ACCOUNTS FOR THE YEAR ENDED 30TH JUNE 2006 m Group sales (24,120 + 8,700 100) Less cost of sales (18,090 + 5,048 100) Group gross profit Less selling, General & Admin. (3,498 + 2,034) Profit before tax Share of associated before tax (30% x 1,017) Other income from sales of shares Les taxation Group (905 + 574) Share of Associated (30% x 351) Profit after tax Less minority interest (W1) Profit transferred to Income Surplus 1,479 105 32,720 (23,038) 9,682 (5,532) 4,150 305 55 4,510 (1,584) 2,926 (261) 2,665

INCOME SURPLUS ACCOUNTS Balance b/f Goodwill written off Add profit for year Interim Dividend paid Proposed Dividend Balance c/d OGYAM LTD GROUPS CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2006 m Property plant & Equipment (4,140 + 2,160) Investment in Associated Net Asset x (2,880 x 30%) Current Assets Stock (2,232 + 1,854) Debtors (2,466 + 990 40) Cash & Bank (378 + 108 + 40 + 750) Current Liabilities Creditors (1,206 + 522) Sundry Creditors (2,160 + 1,260 -140 + 52) Financed by Stated Capital Income Surplus Minority Interest 1,728 3,332 4,086 3,416 1,276 8,778 (5,060) 3,718 10,837 5,400 4,105 9,505 1,332 10,837 m 2,460 (120) 2,665 5,051 (360) (540) 4,105

m 6,300 819 7,119

WORKINGS Group Accounting SHAREHOLDERS Group - Interest Minority Interest Asuo Ltd % 80 20 100 Sab. Masa Ltd % 30 Ass.

Sales of 25% Investment in Asuo Ltd 25% x 80% = 20% Shareholdings after disposal 5

Asuo Ltd % Group = (80 20) 60 Minority Interest 40 100 Minority Interest in P & L A/C 20% from July 1 30 March 9 months 40% from 1 April 30 June 2006 3 months 20% x 9/12 x 1,044 156.6 40% x 3/12 x 1,044 104.4 Minority Interest 261 Computation of gain to Ogyam Ltd Group on partial disposal;of shareholding in Asuo Ltd. million Sale proceeds Share of net assets at date of disposal 25% *80% *{846 bf + 1,800 + (1,044*9/12 216)} Goodwill at acquisition Goodwill written off Tax Net gain Alternative Sales proceeds Original cost 750 (230) 520 million 750

(643) 30 (30) - 107 (52) 55

Share of post acquisition profits 25% *80%* balance brought forward 25% *80%*(800 million + 846 million) 25% *80%* current year profit 25% *80%* ((9/12*1,044m - 216 m) Tax Share of goodwill at acquisition Net gain

329 114 (443) 77 (52) 25 30 55 6

Computation of goodwill on acquisition of Asuo Ltd. million Stated capital 80% x 1,800 million Income surplus 80% x 800 million deficit Net assets acquired Cost Goodwill Goodwill attributable to 25% of its holding sold 25% x 120 million 1,440 (640) 800 920 120

30

QUESTION 3 Suggested re-organisation schemes of Akutu Ltd. Based on the information available and the attached working schedules the following reconstruction scheme is put forward for consideration by all stakeholders. a) Asset valuation In order to bring the value of the assets to economic productive values the assets of the company has been revalued and all losses written off to capital reduction account or in the determination of the maximum possible as shown in the schedule. b) Intangible and fictitious assets All debit balances and intangible assets have been written off to maximum possible loss to it going concern values. This includes debit balance in the Income Surplus accounts. In addition all surpluses available have been used to reduce the maximum possible loss. Financing of working capital The existing shareholders and debenture holders have raised funds to pay the outstanding preference creditors the bank loans and the acquisition of computers as well as payment of scheme cost. Accounting for maximum capital loss The maximum capital loss was allocated to ordinary shares and preference shares of 25,000 million and 4,350 million respectively liquidation they should have lost all their capital values. The remaining stakeholders will be paid in full to enable them support the scheme. 7

c)

d)

e)

Conclusion We hope all the stakeholders would approve the re-organisation scheme for implementation, since all their interests have been properly assessed and evaluated as the best option available taking into consideration the position of the company.

AKUTU LTD WORKING SCHEDULE a) If Akutu Ltd is liquidated the maximum cash available to stakeholders on the realization of the company assets are as follows: m m Land and Buildings 5,800 Loan Bank 5,000 800 Fixtures and fittings 2,300 Motor vehicles 3,000 Computers and Acc. 3,300 Furniture and equipment 3,000 Stock 4,200 Debtors 4,100 Short term Investment 5,000 Cash and Bank 1,360 27,060 Distributed as follows Taxation 2,800 Reconstruction Levy 500 Employees SSF 5,800 Winding up expenses 1,200 (5,080) Amount available to unsecured creditors 21,980 Unsecured creditors comprising Trade Creditors 12% Debenture Debenture Interest

14,860 10,000 4,800

29,660

Analysis The total amount available to unsecured creditors amounted to 21,980 whiles unsecured creditors is 29,980 million. This means that unseen creditors cannot be fully settled in full incase of liquidation. They can only be paid (21,980/29660)74 pesewas per every cedi owed by the company. 8

The shareholders will receive nothing since the amount available is not enough to cover unseen creditors. b) If the stakeholders agree to re-organise the company, the maximum amounts needed to ensure successful re-organisation is calculated as follows: m Goodwill Patent & copyright Development expenditure Land and Building Motor Vehicle Fixtures/Fitting Computer & Acc. Furniture & Equipment Stock Short Term Investment Provision for Bad Debt Reconstruction expenses Share deals A/C Income surplus Debenture interest Preference Dividend Total maximum loss Allocation of Maximum Loss The ordinary shareholders may be allocated 25,000 million to cover all their existing capital and will be called to subscribe for right issue of shares to raise additional capital. The balance of 4,350 million would be allocated to preference shareholders. The remaining stakeholders will have their capital value maintained. The shareholders have to bear all the losses because if the company should be liquidated, they would loose all their capital. c) Calculation of new Capital regained All stakeholders were to convert their interest into ordinary shares as per the question. m Preference share dividend 1,000 Preference share capital converted into equity (10,000 4,350) 5,650 Issue of shares to raise cash 5,000 Debenture interest converted 2,400 Ordinary share issued 15,000 Net ordinary share capital 29,050 9 2,500 600 2,000 (8,660) 450 (1,680) (2,038) 1,245 150 520 540 700 (8,343) 42,766 (2,400) 1,000 29,350

d)

Calculation of Cash Balance Balance as per A/C Issue of Debenture Issue of ordinary shares (15,000 + 5,000) Less payments Reconstruction expense Taxation Computerization National reconstruction Levy Social Security Fund Bank loan Balance c/d

m 1,360 3,100 20,000 24,460 700 2,000 2,500 500 580 5,000 (11,250) 13,180

AKUTU LTD RECONSTRUCTION BALANCE SHEET Non-current Assets Land and Building Fixture and Fittings Motor Vehicles Computer and Acc. Furniture and Equipment Patent and copyright Current Assets Stock Debtors Short Term Inv. Cash and Bank Current Liabilities Trade creditors 12% Debenture Financed By Stated Capital (14,860) 14,150 42,150 (13,100) 29,050 29,050 5,970 4,800 5,000 13,180 29,010 10,000 4,800 3,000 6,600 2,800 800 28,000

10