Case Study 1

Rabnud Media Inc (Rabnud) is a multi-national conglomerate specialising in media entertainment. The company owns many diverse types of stock market quoted businesses involved in film production and the Board of Directors is constantly searching for new investment opportunities. The Board has recently identified Nevahleb Filmsets Inc (NFI) as a potential target company.NFI manufactures film stage sets and props.

Rabnud has various financial criteria for the companies that it wants to buy, and these include:

• Potential fast revenue growth
• Improving profitmargins
• Strong and sustainable cash flows
• Effective and efficient workingcapital management
• A PE ratio of between 5 and 6
• A consistent dividend yield of more than 5%

The Board of Directors is not constrained by the cost of any acquisition RABNUD shareholders are happy to fund the cost of any investment if the financial criteriaare all met.

Financial data available on NFI is as follows:

NFIs shareprice has fluctuated over the last three yearsas follows:

	2023	2022	2021
Share price ()	4.56	4.14	4.44

Income statement for the year to 31 March:

	2023	2022
	'000	'000
Revenue	20,200	16,975
Cost of sales	9,500	7,325
Gross profit	10,700	9,650
Operating expenses
Administration	3,725	3,850
Sales and marketing	425	1,000
Distribution costs	2,500	2,000
Depreciation	1,350	1,200
	8,000	8,050
Operating profit	2,700	1,600
Interest payable	200	125
Profit beforetaxation	2,500	1,475
Taxation	950	550
Profit aftertaxation	1,550	925
Dividends	600	500
Retained profitfor financial year	950	425

Statement offinancial position at 31 March:

	2023		2022
	'000		'000
Non-current assets
Land and buildings	250		250
Plant	5,075		3,060
Vehicles	200		75
	5,525		3,385
Current assets
Inventory	2,075		1,625
Trade receivables	3,240		3,525
Cash at bank andin hand	15		0
	5,330		5,150
Total assets	10,855		8,535
Current liabilities
Bank overdraft	25		500
Trade payables	1,500		3,225
Taxation payable	625		450
Dividends payable	125		150
	2,275		4,325
Non-current liabilities
Bank termloan	0		330
7% Bond (repayable in 2033)	2,250		0
	2,250		330
Total liabilities	4,525		4,655
Equity
Share capital (1 nominal)	2,000		1,000
Share premium	500		0
Retained profits	3,830		2,880
Totalequity	6,330		3,880
Totalequity and liabilities	10,855		8,535

Cash flow statement for the year to 31 March:

		2023
	'000	'000
Cash flowsfrom operating activities
Operating profit	2,700
Add back:Depreciation	1,350
		4,050
Movements in working capital
Increase in inventory	(450)
Decrease in receivables	285
Decrease in payables	(1,725)
		(1,890)
Cash generated from operations		2,160
Taxation paid		(775)
Net cash fromoperating activities		1,385
Cash flowsfrom investing activities
Purchase of property	0
Purchase of plant and equipment	(3,230)
Purchase of vehicles	(260)
		(3,490)
Cash flowsfrom financing activities
Issue of ordinary sharecapital	1,500
Repayment of term loan	(330)
New bond	2,250
Interest paid	(200)
Dividends paid	(625)
		2,595
Net cash movement in the year		490
Cash and cashequivalents at beginning period	(500)
Cash and cash equivalents at endof period	(10)
Net cash movement in theyear	490

Required:

With reference to Rabnuds financial criteria for the companies that it wants to purchase, and usingwhatever financial analysisyou think appropriate:

Prepare a report that evaluates the strengths and weaknesses of Nevahleb Filmsets Inc and recommends, on a financial basis only, whether the Board of Directors of Rabnud should consider Nevahleb Filmsets Inc. a suitable acquisition target.

(30 marks 800 maximumword limit)