Past Papers (Since Dec 14) relating to Ratios 1 / 1

Sample
1088 others answered this question

Question 2

Nonat Co is a manufacturer of domestic appliances. Its chairman is pleased with the results for the year ended 31 December 2015 as they show a continuing improvement over recent past performance.

However, the finance director says that a better assessment of the company’s performance would be made by a comparison to other companies in the same sector.

The finance director has obtained some ratios for Nonat Co’s business sector, based on a year end of 31 December 2015, which are:

Return on capital employed (ROCE) 18·5%
Net asset (total assets less current liabilities) turnover 1·8 times
Gross profit margin 21%
Operating profit margin 10·3%
Current ratio 1·6:1
Gearing (debt/ekvity) 36%

The summarised financial statements of Nonat Co are:

Statement of profit or loss for the year ended 31 December 2015

$’000
Revenue62,500
Cost of sales(51,800)
Gross profit10,700
Operating costs(5,800)
Finance costs(1,800)
Profit before tax3,100
Income tax expense(1,000)
Profit for the year2,100

Statement of financial position as at 31 December 2015

$’000 $’000
Assets
Non-current assets
Property 8,100
Owned plant 12,600
Leased plant 12,200
32,900
Current assets 16,400
Total assets 49,300
Equity and liabilities
Equity
Equity shares of $1 each 9,000
Property revaluation surplus 4,000
Retained earnings 10,600
23,600
Non-current liabilities
10% loan notes 10,000
Finance lease obligations 6,400
 16,400
Current liabilities
Finance lease obligations 2,100
Other current liabilities 7,200
 9,300
Total equity and liabilities 49,300

Required:

(a)

Prepare for Nonat Co the equivalent ratios to those of its sector.
Note: The finance lease obligations should be treated as debt in the ROCE and gearing calculations.

(6 marks)

(b)

Analyse the financial performance and position of Nonat Co for the year to 31 December 2015 in comparison
to the sector averages.

(9 marks)

Reveal answer
962 others answered this question

Question 2a

Xpand is a public company which has grown in recent years by acquiring established businesses.

The following financial statements for two potential target companies are shown below.

They operate in the same industry sector and Xpand believes their shareholders would be receptive to a takeover.

An indicative price for 100% acquisition of the companies is $12 million each.

Statements of profit or loss for the year ended 30 September 2015

Kandid Kovert
$’000 $’000
Revenue 25,000 40,000
Cost of sales (19,000)
 (32,800)
Gross profit 6,000 7,200
Distribution and administrative expenses (1,250) (2,300)
Finance costs (250)
 (900)
Profit before tax 4,500 4,000
Income tax expense (900)
 (1,000)
Profit for the year 3,600
 3,000

Statements of financial position as at 30 September 2015

Non-current assets nil 3,000
Property 4,800 2,000
Owned plant nil
 5,300
Leased plant 4,800
 10,300
Current assets
Inventory 1,600 3,400
Trade receivables 1,600 5,100
Bank 1,100
 200
4,800
 8,700
Total assets 9,600
 19,000
Equity and liabilities
Equity
Equity shares of $1 each 1,000 2,000
Property revaluation surplus nil 900
Retained earnings 1,600
 2,700
2,600
 5,600
Non-current liabilities
Finance lease obligation nil 4,200
5% loan notes (31 December 2016) 5,000 nil
10% loan notes (31 December 2016) nil
 5,000
5,000
 9,200
Current liabilities
Trade payables 1,250 2,100
Finance lease obligation nil 1,000
Taxation 750
 1,100
2,000
 4,200
Total equity and liabilities 9,600
 19,000

Notes

(i)

Carrying value of plant:

Kandid Kovert
$’000 $’000
Owned plant – cost 8,000 10,000
Less government grant (2,000)
6,000
Accumulated depreciation (1,200)
 (8,000)
4,800 2,000
Leased plant – original fair value nil 8,000
(ii)

The following ratios have been calculated:

Kandid Kovert
Return on year-end capital employed (ROCE) 62·5% 31·0%
(finance lease obligations are treated as debt)
Net asset (taken as same figure as capital employed) turnover 3·3 times 2·5 times
Gross profit margin 24·0% 18·0%
Profit margin (before interest and tax) 19·0% 12·3%
Current ratio 2·4:1 2·1:1
Closing inventory holding period 31 days 38 days
Trade receivables’ collection period 31 days 47 days
Trade payables’ payment period (using cost of sales) 24 days 23 days
Gearing (debt/(debt + equity)) 65·8% 64·6%

Required:

(a)

Using the above information, assess the relative performance and financial position of Kandid and Kovert for the year ended 30 September 2015 in order to assist the directors of Xpand to make an acquisition decision.

(11 marks)

Reveal answer

We use cookies to help make our website better. We'll assume you're OK with this if you continue. You can change your Cookie Settings any time.

Cookie SettingsAccept