UNIVERSITY OF DAR ES SALAAM
UNIVESITY OF DAR ES SALAAM BUSINESS SCHOOL
MASTER OF BUSINESS ADMINISTRATION
DEPARTMENT OF FINANCE
FN 606: ADVANCED CORPORATE FINANCE
GROUP ASSIGNMENT:
S/N
01.
02.
03.
04.
05.
Names
Honoranancy Massawe
Ng’wiza Seth Wilson
Charles Alen Alex
Emmanuel Selestine Mrosso
Evord Tesha
Registration Number
2022 – 06 - 00047
2022 - 06 - 00076
2022 – 06 - 00007
2022 – 06 - 01909
2022 – 06 - 00919
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QUESTION NO. 1
You have been provided with the following end-of-the-year data for ABC Ltd for
the 2019 – 2023 period.
2019
2020
2021
2022
2023
Price (TZS)
3953
5070
5570
5041
5160
EPS (TZS)
295
325
346
355
388
P/E
13.4
15.6
16.1
14.2
13.3
CFPS (TZS)
474
517
561
595
645
P/CFPS
8.34
9.81
9.93
8.47
8
SPS (TZS)
3806
3858
4093
4309
4685
P/SPS
1.04
1.31
1.36
1.17
1.1
Average
14.52
8.91
1.2
EPS=Earnings Per share
CFPS=Cash-flows Per share
SPS=Sales Per share
Required:
(i) Use this information to estimate the expected price at the end of 2024 (EP(2024)),
based on the following ratios/approaches: the PE ratio and the price-to-cashflow ratio (HINT: Assume that the growth rate observed for the given period
will prevail in the near future).
(ii) Briefly explain why your results in (i) are different or similar.
(iii) A friend has suggested that the price at the end of 2024 can easily be obtained
by trending the price data for the 2019-2023 period. Discuss the rationality of
such argument and its weaknesses.
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ANSWER
(i) Estimation of Expected Price at the End of 2024:
(a) Using P/E Ratio:
EP (2024) = EPS (2023) × P/E (2023)
EP (2024) = 388 × 13.3
EP (2024) = 5,152.4 TZS
(b) Using Price-to-Cash-Flow (P/CFPS) Ratio:
(2024) = CFPS (2023) × P/CFPS (2023)
EP (2024) = 645 × 8
EP (2024) =5,160TZS
(ii) Explanation of Differences or Similarities:
The differences in the estimated prices arise from the fact that each ratio focuses on
different financial metrics. P/E ratio is based on earnings per share, while the P/CFPS
ratio is based on cash flows per share. If the company's earnings and cash flows grow
at different rates or if there are variations in market sentiment, these ratios may result
in different estimates.
The two approaches provide slightly different estimates for the expected price at the
end of 2024. This disparity may arise from variations in investor perceptions, market
conditions, or other factors affecting the P/E and P/CFPS ratios. The P/E ratio is
based on earnings, while the P/CFPS ratio focuses on cash flows, and differences in
these measures can impact the final estimates
(iii) Rationality and Weaknesses of Trending Argument:
Rationality:
Trending the price data assumes that historical patterns will continue into the future.
If the company has a consistent growth rate and market conditions remain relatively
stable, historical trends could provide a reasonable estimate.
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Weaknesses:
✓ External factors affecting the market may change, leading to different growth rates.
✓ The company's performance might be subject to economic cycles, industry
changes, or other unpredictable events.
✓ Relying solely on historical trends may overlook fundamental shifts in the business
environment.
In summary, while trending can provide a quick estimate, it should be used cautiously
as it may not account for unforeseen changes in the market or the company's
performance. Combining multiple valuation methods, as done in part (i), can offer a
more robust analysis.
QUESTION NO 2.
Ladies Exclusive Ltd (LEL) is a privately owned design house and retailer of
clothing and women’s fashion items. The existing top management are the
shareholders. In order to retain top-class designers and store managers, LEL is
considering the possibility of offering senior designers and store managers an
equity stake in the company. This has necessitated the need to set a value of the
firm’s shares.
LEL has no debt and has never paid a dividend. Its after-tax profits for the past 5
years have been TZS 100 million, 119 million, 125 million, 156 million and 187
million and there is no reason to doubt that profits will continue to grow over the
years ahead in a steady fashion. The historic price-earning (P/E) ratios of two listed
competitors of LEL – Topline Ltd and Pepeta Ltd – who also operate in the same
market are 14 and 11 respectively. Over the past years, privately owned businesses
have been trading at a 15 percent discount to their listed counterparts. Topline and
Pepeta are both financed 25 percent by debt; pay dividend of 25 and 15 percent of
profits after tax respectively and have been growing at about 10 and 7 percent per
annum respectively.
Based on the information provided, any assumptions that you may consider
appropriate and your general knowledge in finance, answer the following
questions:
i.
What do you consider the main reasons for privately owned businesses to
trade at a discount to their listed counterparts?
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ii.
Consider the average P/E multiple of LEL competitors as your starting point.
Based on LEL competitors’ numbers, explain why and how each of the
following will help you adjust your starting point P/E multiple in the process
of estimating LEL’s P/E multiple: debt position; profit growth, and dividend
pay-out Based on your responses in (ii), suggest a P/E multiple that you
consider appropriate in valuing LEL [You need to give a number here and
defend it since you will need a specific P/E multiple in part (iv)] Assuming
that TZS 187 million is a sustainable level of earnings for LEL, using your
suggested P/E multiple and making the necessary adjustments, suggest a
possible value for LEL
ANSWERS:
i.
Reasons for Privately Owned Businesses Trading at a Discount
✓ Lack of Liquidity:
Shares of privately owned businesses are less liquid than those of publicly
traded companies. Investors may require a discount due to the difficulty of
selling or transferring these shares most specifically in the secondary markets.
✓ Limited Access to Information:
Private companies may not disclose as much financial information as public
companies. Investors may demand a discount to compensate for the lack of
transparency.
✓ Higher Risk Perception:
Private companies often have higher risk profiles as they may not have the same
level of scrutiny, governance, and regulatory oversight as publicly listed firms.
Investors may discount the valuation due to perceived higher risk.
✓ Marketability and Control:
Lack of marketability and control over decision-making can also contribute to a
discount, as private shareholders may not have the same exit options or
influence as public shareholders.
✓ Regulatory Differences:
Public companies are subject to more stringent regulatory oversight and
transparency requirements, providing a higher level of investor protection
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ii.
▪
▪
▪
Adjustments to P/E Multiple for LEL
Debt Position: Since LEL has no debt, it might be considered less risky compared
to its competitors with debt ratio of 25%. Adjust the P/E multiple upward.
Profit Growth: LEL has demonstrated consistent profit growth, suggesting a
positive outlook. This could lead to a higher P/E multiple compared to
competitors with lower growth rates, given that investors often pay a premium
for companies with strong growth prospects, LEL's P/E may be adjusted
upward.
Dividend Pay-out: LEL has not paid dividends, which might be attractive to
investors seeking capital appreciation. This could result in a higher P/E
multiple compared to competitors with dividend payments.
Suggested P/E Multiple:
Starting with the average P/E multiple of competitors (Topline Ltd and Pepeta Ltd):
Average P/E = {14 + 11}/2 = 12.5
Adjustments:
Adjusted P/E = Average P/E * Adjustment Factor
Adjustment Factor = (1 + Debt Adjustment) * (1 + Growth Adjustment) * (1 + Dividend
Adjustment)
Adjustment Factor = (1 + 0) * (1 + Positive Growth Adjustment) * (1 + No Dividend
Adjustment)
Adjustment Factor = (1 + 0) * (1 + Positive) * (1 + 0)
Adjustment Factor = (1 + Positive)
Adjustment Factor = Positive. Hence suggesting a P/E Ratio of 13
Thus, the suggested adjusted P/E multiple is higher than the average, reflecting the
positive factors.
iii.
Valuation of LEL:
Assuming TZS 187 million is a sustainable level of earnings:
Estimated Value = Earnings * Suggested P/E Multiple
Estimated Value = 187 million * 13
Estimated Value = 2,432 million
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