Statement of profit or loss for the year ended OrganiGrow Elements 31 December 2023 Ltd Ltd...
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Statement of profit or loss for the year ended OrganiGrow Elements 31 December 2023 Ltd Ltd R'million R'million Revenue 1 373 982 Operating expenses (624) (736) Operating profit Finance costs Profit before taxation Taxation Profit for the year Dividends declared 749 246 (16) (68) 733 178 (198) (48) 535 130 (160) (110) 375 20 Net income for the year Earnings per share (cents) Share Price information (prices in cents) Share price movements: High for last financial year Low for last financial year Share price today (27 January 2024) P/E ratios today 107.00 130.00 OrganiGrow Ltd Elements Ltd 1712 1 177 1 430 910 1 040 1 391 13 8 Statement of Financial Position at 31 December 2023 OrganiGrow Ltd Elements Ltd R'million R'million Assets Non-Current Assets Property, Plant and Equipment (Net Book value) 1 018 1 018 Current Assets Inventories Trade and other receivables Cash and cash equivalents Total Assets Equity and Liabilities Equity and reserves Issued share capital (ordinary R1 shares) Revaluation reserve Accumulated income Liabilities Non-Current Liabilities Bank loans 1 468 1468 45 90 190 280 1 600 1 835 50 420 2 853 1 888 500 100 120 120 1 525 200 2 145 420 290 850 290 850 Current Liabilities Bank loans and bank overdraft 40 220 Taxation 198 48 Trade and other payables 180 350 418 618 Total Liabilities 708 1 468 Total Equity and Liabilities 2 853 1 888 General information: The average gearing ratio for the industry (long-term debt as a proportion of total long-term funding or Debt/(Debt + Equity) x 100) is 25% based on book values. Generally, companies aim to maintain a dividend cover of at least 2 times to provide a reasonable cash return on investment to shareholders, while at the same time keeping an adequate amount of retained earnings to grow the business. Generally, an interest cover ratio of 2 to 3 is regarded as an acceptable minimum. A ratio of lower than 2 would be seen as high-risk. A ratio of 3 to 7 is seen as good as investors would often prefer to see an interest coverage ratio of 3 or above. A ratio of more than 7 may be interpreted as safe. The average P/E ratio for the industry is currently estimated at 11. Elements Ltd Elements Ltd was established in 2021. Elements Ltd's startup funds consisted mainly of ordinary shares that were issued as well as bank loans to establish the company and obtain all the required equipment and resources to start operating. An international company approached Elements Ltd at the start of 2023, with an aim of acquiring Elements Ltd. The bid was at market value, where the directors of Elements Ltd saw the potential of the company and waived the offer. In preliminary discussions with the directors of Elements Ltd, a premium of 28% above the market price was mentioned as being something that they might consider when evaluating offers. A few months ago, towards the end of 2023, Elements Ltd won a lucrative fertiliser supply contract in Cameroon. OrganiGrow Ltd also tendered for the contract and knows that the contract will require a cash injection of R120 million to start the contract. The following information should be used, in conjunction with the key financial information above, to value Elements Ltd: . • . • Elements Ltd's revenue is expected to rise by 25% per year for the next 2 years and then stay constant thereafter. Operating expenses are expected to rise by 20% per year for the next 2 years and then stay constant thereafter. Elements Ltd's finance costs are expected to stay constant each year in the future. With the Cameroon supply contract being awarded, an R120 million cash injection is required in 2024, the first year, to start the contract. Elements Ltd invested R 20 million in non-current assets and R 3 million in working capital last year. The annual investment amount in non-current assets is expected to remain constant, now and in the future. The annual working capital investment amount is expected to increase by 50% in 2024, the first year, and from there on remain constant in the future. The marginal tax rate is 27%, payable in the year in which the liability arises. Elements Ltd's cost of equity is 18%. Required: 2.1 Calculate and discuss the following key ratios for both OrganiGrow Ltd and Elements Ltd, and compare these to the industry averages provided: (a) (b) (c) Dividend cover Interest cover Show all calculations. Capital gearing ratio (using the formula: Debt/(Debt + Equity) x 100) (8 marks) 2.2 Calculate the range of possible values that OrganiGrow Ltd could place on Elements Ltd, using the P/E valuation method and using the share price information provided in the scenario. Show all calculations. (3 marks) 2.3 Calculate the value of the equity in Elements Ltd (in total) by forecasting future cash flows to equity and discounting them to present value using the cost of equity. Show all calculations. (12 marks) Statement of profit or loss for the year ended OrganiGrow Elements 31 December 2023 Ltd Ltd R'million R'million Revenue 1 373 982 Operating expenses (624) (736) Operating profit Finance costs Profit before taxation Taxation Profit for the year Dividends declared 749 246 (16) (68) 733 178 (198) (48) 535 130 (160) (110) 375 20 Net income for the year Earnings per share (cents) Share Price information (prices in cents) Share price movements: High for last financial year Low for last financial year Share price today (27 January 2024) P/E ratios today 107.00 130.00 OrganiGrow Ltd Elements Ltd 1712 1 177 1 430 910 1 040 1 391 13 8 Statement of Financial Position at 31 December 2023 OrganiGrow Ltd Elements Ltd R'million R'million Assets Non-Current Assets Property, Plant and Equipment (Net Book value) 1 018 1 018 Current Assets Inventories Trade and other receivables Cash and cash equivalents Total Assets Equity and Liabilities Equity and reserves Issued share capital (ordinary R1 shares) Revaluation reserve Accumulated income Liabilities Non-Current Liabilities Bank loans 1 468 1468 45 90 190 280 1 600 1 835 50 420 2 853 1 888 500 100 120 120 1 525 200 2 145 420 290 850 290 850 Current Liabilities Bank loans and bank overdraft 40 220 Taxation 198 48 Trade and other payables 180 350 418 618 Total Liabilities 708 1 468 Total Equity and Liabilities 2 853 1 888 General information: The average gearing ratio for the industry (long-term debt as a proportion of total long-term funding or Debt/(Debt + Equity) x 100) is 25% based on book values. Generally, companies aim to maintain a dividend cover of at least 2 times to provide a reasonable cash return on investment to shareholders, while at the same time keeping an adequate amount of retained earnings to grow the business. Generally, an interest cover ratio of 2 to 3 is regarded as an acceptable minimum. A ratio of lower than 2 would be seen as high-risk. A ratio of 3 to 7 is seen as good as investors would often prefer to see an interest coverage ratio of 3 or above. A ratio of more than 7 may be interpreted as safe. The average P/E ratio for the industry is currently estimated at 11. Elements Ltd Elements Ltd was established in 2021. Elements Ltd's startup funds consisted mainly of ordinary shares that were issued as well as bank loans to establish the company and obtain all the required equipment and resources to start operating. An international company approached Elements Ltd at the start of 2023, with an aim of acquiring Elements Ltd. The bid was at market value, where the directors of Elements Ltd saw the potential of the company and waived the offer. In preliminary discussions with the directors of Elements Ltd, a premium of 28% above the market price was mentioned as being something that they might consider when evaluating offers. A few months ago, towards the end of 2023, Elements Ltd won a lucrative fertiliser supply contract in Cameroon. OrganiGrow Ltd also tendered for the contract and knows that the contract will require a cash injection of R120 million to start the contract. The following information should be used, in conjunction with the key financial information above, to value Elements Ltd: . • . • Elements Ltd's revenue is expected to rise by 25% per year for the next 2 years and then stay constant thereafter. Operating expenses are expected to rise by 20% per year for the next 2 years and then stay constant thereafter. Elements Ltd's finance costs are expected to stay constant each year in the future. With the Cameroon supply contract being awarded, an R120 million cash injection is required in 2024, the first year, to start the contract. Elements Ltd invested R 20 million in non-current assets and R 3 million in working capital last year. The annual investment amount in non-current assets is expected to remain constant, now and in the future. The annual working capital investment amount is expected to increase by 50% in 2024, the first year, and from there on remain constant in the future. The marginal tax rate is 27%, payable in the year in which the liability arises. Elements Ltd's cost of equity is 18%. Required: 2.1 Calculate and discuss the following key ratios for both OrganiGrow Ltd and Elements Ltd, and compare these to the industry averages provided: (a) (b) (c) Dividend cover Interest cover Show all calculations. Capital gearing ratio (using the formula: Debt/(Debt + Equity) x 100) (8 marks) 2.2 Calculate the range of possible values that OrganiGrow Ltd could place on Elements Ltd, using the P/E valuation method and using the share price information provided in the scenario. Show all calculations. (3 marks) 2.3 Calculate the value of the equity in Elements Ltd (in total) by forecasting future cash flows to equity and discounting them to present value using the cost of equity. Show all calculations. (12 marks)
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21 Key Ratios Calculation and Discussion a Capital Gearing Ratio textCapital Gearing Ratio fracDebtDebt Equity100 OrganiGrow Ltd textDebt 290 40 330 text Rmillion textEquity 500 120 1525 2145 text Rmi... View the full answer
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Financial Accounting an introduction to concepts, methods and uses
ISBN: 978-0324789003
13th Edition
Authors: Clyde P. Stickney, Roman L. Weil, Katherine Schipper, Jennifer Francis
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