Victory Ltd is a public company that would like to acquire (100% of) a suitable private...

     

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Victory Ltd is a public company that would like to acquire (100% of) a suitable private company. It has obtained the following draft financial statements for two companies, Joy Ltd and Merry Ltd. They operate in the same industry and their managements have indicated that they would be receptive to a takeover. Statement of Profit or Loss for the year ended 30 September 2015 Joy Ltd GHS'000 12,000 (10,500) Revenue Cost of sales Gross profit Operating expenses Finance costs - loan - overdraft - lease 1,500 (240) (210) nil nil Merry Ltd GHS'000 20,500 (18,000) 2,500 (500) (300) (10) (290) Profit before tax Income tax expense Profit for the year Note: dividends paid during the year Non-current assets Freehold factory (note (i)) Owned plant (note (ii)) Leased plant (note (ii)) Current assets Inventory Trade receivables Bank 1,050 (150) Statements of financial position as at 30 September 2015 Assets Total assets 900 250 4,400 5,000 nil 9,400 2,000 2,400 600 5,000 14,400 1,400 (400) 1,000 700 nil 2,200 5,300 7,500 3,600 3,700 nil 7,300 14,800 Equity and liabilities Equity shares of GHS1 each Property revaluation reserve Retained earnings Non-current liabilities Finance lease obligations (note (iii)) 7% loan notes 10% loan notes Deferred tax Government grants 2,000 900 2,600 5,500 nil 3,000 nil 600 1,200 4,800 2,000 nil 800 2,800 3,200 nil 3,000 100 nil 6,300 Current liabilities Bank overdraft Trade payables Government grants Finance lease obligations (note (iii)) Taxation Total equity and liabilities Notes (i) Both companies operate from similar premises. (ii) Additional details of the two companies' plant are: nil 3,100 400 nil 600 4,100 14,400 Joy Ltd GHS'000 Owned plant - cost 8,000 nil Leased plant - original fair value There were no disposals of plant during the year by either company. 1,200 3,800 nil 500 200 5,700 14,800 Merry Ltd GHS'000 10,000 7,500 (iii) The interest rate implicit within Merry Ltd's finance leases is 7-5% per annum. For the purpose of calculating ROCE and gearing, all finance lease obligations are treated as long-term interest bearing borrowings. (iv) The following ratios have been calculated for Joy Ltd and can be taken to be correct: Return on year end capital employed (ROCE) 14-8% (capital employed taken as shareholders' funds plus, long-term interest bearing borrowings - see note (iii) above) Pre-tax return on equity (ROE) Net asset (total assets less current liabilities) turnover Gross profit margin Operating profit margin Current ratio Closing inventory holding period Trade receivables' collection period Trade payables' payment period (using cost of sales) Gearing (see note (iii) above) Interest cover Dividend cover 19.1% 1-2 times 12.5% 10-5% 1-2:1 70 days 73 days 108 days 35-3% 6 times 3-6 times Required: (a) Calculate for Merry Ltd the ratios equivalent to all those given for Joy Ltd above.3 (b) Assess the relative performance and financial position of Joy Ltd and Merry Ltd for the year ended 30 September 2015 to inform the directors of Victory Ltd in their acquisition decision (c) Explain the limitations of ratio analysis and any further information that may be useful to the directors of Victory Ltd when making an acquisition decision. Victory Ltd is a public company that would like to acquire (100% of) a suitable private company. It has obtained the following draft financial statements for two companies, Joy Ltd and Merry Ltd. They operate in the same industry and their managements have indicated that they would be receptive to a takeover. Statement of Profit or Loss for the year ended 30 September 2015 Joy Ltd GHS'000 12,000 (10,500) Revenue Cost of sales Gross profit Operating expenses Finance costs - loan - overdraft - lease 1,500 (240) (210) nil nil Merry Ltd GHS'000 20,500 (18,000) 2,500 (500) (300) (10) (290) Profit before tax Income tax expense Profit for the year Note: dividends paid during the year Non-current assets Freehold factory (note (i)) Owned plant (note (ii)) Leased plant (note (ii)) Current assets Inventory Trade receivables Bank 1,050 (150) Statements of financial position as at 30 September 2015 Assets Total assets 900 250 4,400 5,000 nil 9,400 2,000 2,400 600 5,000 14,400 1,400 (400) 1,000 700 nil 2,200 5,300 7,500 3,600 3,700 nil 7,300 14,800 Equity and liabilities Equity shares of GHS1 each Property revaluation reserve Retained earnings Non-current liabilities Finance lease obligations (note (iii)) 7% loan notes 10% loan notes Deferred tax Government grants 2,000 900 2,600 5,500 nil 3,000 nil 600 1,200 4,800 2,000 nil 800 2,800 3,200 nil 3,000 100 nil 6,300 Current liabilities Bank overdraft Trade payables Government grants Finance lease obligations (note (iii)) Taxation Total equity and liabilities Notes (i) Both companies operate from similar premises. (ii) Additional details of the two companies' plant are: nil 3,100 400 nil 600 4,100 14,400 Joy Ltd GHS'000 Owned plant - cost 8,000 nil Leased plant - original fair value There were no disposals of plant during the year by either company. 1,200 3,800 nil 500 200 5,700 14,800 Merry Ltd GHS'000 10,000 7,500 (iii) The interest rate implicit within Merry Ltd's finance leases is 7-5% per annum. For the purpose of calculating ROCE and gearing, all finance lease obligations are treated as long-term interest bearing borrowings. (iv) The following ratios have been calculated for Joy Ltd and can be taken to be correct: Return on year end capital employed (ROCE) 14-8% (capital employed taken as shareholders' funds plus, long-term interest bearing borrowings - see note (iii) above) Pre-tax return on equity (ROE) Net asset (total assets less current liabilities) turnover Gross profit margin Operating profit margin Current ratio Closing inventory holding period Trade receivables' collection period Trade payables' payment period (using cost of sales) Gearing (see note (iii) above) Interest cover Dividend cover 19.1% 1-2 times 12.5% 10-5% 1-2:1 70 days 73 days 108 days 35-3% 6 times 3-6 times Required: (a) Calculate for Merry Ltd the ratios equivalent to all those given for Joy Ltd above.3 (b) Assess the relative performance and financial position of Joy Ltd and Merry Ltd for the year ended 30 September 2015 to inform the directors of Victory Ltd in their acquisition decision (c) Explain the limitations of ratio analysis and any further information that may be useful to the directors of Victory Ltd when making an acquisition decision.

Answer rating: 100% (QA)

a Calculation of Ratios for Merry Ltd Return on Capital Employed ROCE ROCE Profit before Tax Shareholders Funds Longterm Interest Bearing Borrowings x 100 ROCE 1400 2800 3000 x 100 ROCE 2667 Pretax Re... View the full answer