Question as attached. Need to submit in 6 hours.Malaysian time
QUESTION 1 (37 Marks)
Kurung Sdn. Bhd. is a company located in Kajang, which nature of business is primarily selling high quality fabrics, thread, needles and stuffs related to sewing. The owner, Puan Leha has been approached by Puan Sari who owns Kebaya Sdn. Bhd. whose company engages in the production of premium Malay clothing in Putrajaya. The latter proposed to the former for a business venture involving business combination for a win-win situation given the shrinking market for Malay clothing in Selangor, KL and Putrajaya. Balances of their accounts are given below.
(NBV: Net book Value) Kurung (RM’000) Kebaya (RM’000)
NBV NBV Fair Value
Property, Plant & Equipment (PPE) 2,000 762 15% higher
Investments 260 80
Bank 85 30
Trade Receivables 93 50 5% lower
Inventories 112 73 20% lower
Preliminary Expenses 10 5
Trade Payables 160 75
Tax Payable 40 32
Ordinary Shares (OS) @ RM1 par 2,000 500
8% Pref. Shares (PS) @ RM1 par 200
10% Loan Stocks (LS) 100
Retained Earnings 360 93
Both Puan Leha and Puan Sari agreed to the following salient terms for the proposed business combination:
i) Kurung will take over the net assets of Kebaya excluding:
1) Bank;
2) Preliminary expenses;
3) Tax liability: Settled with an additional 25% charges. 4) Investment assets: Sold off for 12.5% loss
ii) Upon the closing-off of Kebaya, Kurung will:
a. Issue new “X” units of PS at 20% premium each, which total units are 20% less than the units available in Kebaya. The new PS will carry a new dividend rate which is 25% higher than the existing rate.
b. Issue new “Y” units of LS at 10% premium each, which total units are 10% more than the units available in Kebaya. The new LS will carry new interest rate which is 20% higher than the existing rate.
c. Issue new “6-for-every-10” units of OS available in Kebaya (“Z” units) at 25% premium each.
d. Absorb the liquidation expenses of RM30,000 only.
e. Classify the 5% lower in Trade Receivables as bad debt.
Required:
(a) Identify and explain the most appropriate type of business combination 2 marks based on facts presented above.
(b) Calculate: 8 marks
(i) (X), (Y), and (Z) respectively.
(ii) The new issue price of PS and LS in Kurung respectively.
(iii) The new dividend and interest rates for PS and LS in Kurung respectively.
(c) Calculate the value (in RM) of the purchase consideration transferred 2 marks
(d) Calculate the value and identify the type of goodwill arising from the 3 marks above business combination process.
(e) Assuming the ratio in (ii)(c) above is “3-for-every-1”, will and how your 4 marks answer in (d) above would be different ?
(f) Prepare the realization account for Kebaya, showing clearly the gains 6 marks or losses on realization.
(g) Construct the initial Statement of Financial Position for Kurung 10 marks immediately after the business combination.
(h) Identify and discuss the type of synergistic benefits accruing to Kurung 2 marks following the above corporate exercise.
QUESTION 2 (50 Marks)
Mr. Wan Emdibi owns both firms of Karung Sdn. Bhd. and Kebayan Sdn. Bhd. The financial information of both firms is presented below.
Karung (RM’000) Kebayan (RM’000)
Assets 570 500
Liabilities 170 100
Equity & Reserves 400 400
Earnings 20 12
Highest earnings (past 5 years) 22 13
Lowest earnings (past 5 years) 20 12
Dividend paid 15 8
Shareholder’ Required Rate of Return 4% 4%
PE Ratio 13 12
Additional Information
(1) RM50,000 of assets are intangibles in both firms.
(2) Preference shares constitute 20% of the total equity & reserves in both firms.
(3) Retained earnings are RM40,000 and RM20,000 respectively for each Karung and Kebayan.
(4) The par value of ordinary share is RM1 and RM0.50 respectively for each Karung and Kebayan.
Required:
(a) Discuss the timing and reasons as to when and why Mr. Wan Emdibi 5 marks would be interested to conduct business valuation exercise.
(b) Identify and explain potential factors that might affect Mr. Wan Emdibi’s 4 marks business valuation exercise and hence his investment decision.
(c) Calculate the firm value per share for both companies using:
6 marks
(i) The asset based model;
(ii) The cash flow based model using dividend valuation approach, 6 marks
assuming that the additional risk premium is 1% and 2% respectively
for each Karung and Kebayan.
(iii) The cash flow based model using dividend growth approach, 6 marks
assuming that the growth rate is 0.1% and 0.2% respectively for each
Karung and Kebayan.
(iv) The income based model using PE Ratio approach 6 marks
(v) The income based model using earnings yield approach. 6 marks
(d) Assuming that the fair value of assets is RM80,000 higher and RM50,000 6 marks lower for each Karung and Kebayan respectively. Recalculate the firm value per share for both companies using the asset based model.
(e) Explain to Mr. Wan Emdibi as to the relative strength and weaknesses 5 marks of each valuation method applied above.
QUESTION 3 (25 Marks)
Kurung Sdn. Bhd. is a company located in Kajang, which nature of business is primarily selling high quality fabrics, thread, needles and stuffs related to sewing. The owner, Puan Leha has been approached by Puan Sari who owns Kebaya Sdn. Bhd. whose company engages in the production of premium Malay clothing in Putrajaya. The latter proposed to the former for a business venture involving business combination for a win-win situation given the shrinking market for Malay clothing in Selangor, KL and Putrajaya. Balances of their accounts are given below.
Kurung (RM’000) Kebaya (RM’000)
NBV Fair Value NBV Fair Value
Property, Plant & Equipment 340 430 380 540
Goodwill 20 - 10 -
Inventories 80 - 60 -
Trade Receivables 60 - 80 -
Trade Payables 80 - 30 -
Bank 80 - 60 -
Ordinary Shares @ RM1 par 600 - 200 -
10% Pref. Shares @ RM1 par - - 200 -
Retained Profits/(Losses) (100) - 160 -
Both Puan Leha and Puan Sari agreed to the following salient terms for the proposed business combination:
iii) The formation of a new entity named KurungKebaya Sdn. Bhd. with an authorized ordinary share capital of 2 million at RM1 par.
iv) KurungKebaya Sdn. Bhd. will:
a. Issue 6% preference shares at RM1 each for an amount equivalent to the 20% of its authorized ordinary share capital.
b. Acquire ALL assets and liabilities of both firms except for 50% of the inventories (each company) and cash equivalent to 12.5% in Kurung and RM10,000 in Kebaya. The remaining cash is meant for liquidation expenses.
c. Issue an additional RM25,000 worth of Ordinary Shares at par to each Puan Leha and Puan Sari being founders of each company to register the new entity. The issued shares are paid cash by both founders.
v) The business combination process will be satisfied by the issuance of shares in KurungKebaya Sdn. Bhd. as follows:
(1) Ordinary Shares: To Kurung (an amount equivalent to 40,000 units less than its existing ordinary shares)
(2) Ordinary Shares: To Kebaya (an amount equivalent to 330,000 units more than its existing ordinary shares)
(3) Preference shares: To Kebaya (an amount equivalent to 20% more than its existing preference shares), meant to discharge its existing preference shares.
Required:
(a) Identify and explain the most appropriate type of business combination 2 marks based on facts presented above.
(b) Calculate the value (in RM) of the consideration transferred 1 mark
(c) Calculate the value and identify the type of goodwill arising from the 3 marks above business combination process.
(d) Assuming the value of preference shares in (iii)(3) above is only 50% of 2 marks Kebaya’s existing preference shares value, will and how your answer in (c) above would be different ?
(e) Prepare the realization account for both Kurung and Kebaya, showing 6 marks clearly the gains or losses on realization.
(f) Construct the initial Statement of Financial Position for KurungKebaya 5 marks immediately after the business combination.
(g) Identify and discuss other products or services which KurungKebaya 3 marks could offer in further diversifying the business in the combined entity.
(h) Suggest and explain the main difference between the accounting 3 marks treatment for absorption and amalgamation.
Q Full Scored
1 37
2 50
3 25
Total 112
10%