Quiz 2 (2)

Download as pdf or txt
Download as pdf or txt
You are on page 1of 3

Xpand is a public entity which has grown in recent years by acquiring

established businesses. The following financial statements for two potential


target entities 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 entities is $12 million each.
Statements of profit or loss for the year ended 30 September 20X5

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
FR: FINANCIAL REPORTING

Statements of financial position as at 30 September 20X5


$000 $000
Non-current assets
Property nil 3,000
Owned plant 4,800 2,000
Right-of-use asset nil 5,300
4,800 10,300
Current assets
Inventory 1,600 3,400
Trade receivables 2,100 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
Lease liability nil 4,200
5% loan notes (31 December 20X6) 5,000 nil
10% loan notes (31 December 20X6) nil 5,000
5,000 9,200
Current liabilities
Trade payables 1,250 2,100
Lease liability nil 1,000
Taxation 750 1,100

2,000 4,200

Total equity and liabilities 9,600 19,000

186 KAPLAN PUBLISHING


CONSTRUCTED RESPONSE QUESTIONS – SECTION C : SECTION 3

Notes
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
Right-of-use asset – initial value nil 8,000
The following ratios have been calculated:
Kandid Kovert
Return on year-end capital employed (ROCE) 62.5%
Net asset (taken as same figure as capital 3.3times
Gross profitturnover
employed) margin 24.0%
Profit margin (before interest and tax) 19.0%
Current ratio 2.4:1
Closing inventory holding period 31 days
Trade receivables collection period 31 days
Trade payables payment period (using cost of 24 days
Gearing
sales) (debt/(debt + equity)) 65.8%

Required:
Calculate the missing ratios for Kovert. All lease liabilities are treated as debt,
and profit before interest and tax should be used for the calculation of return on
capital employed. (4 marks)
Using the above information, assess the relative performance and financial
position of Kandid and Kovert for the year ended 30 September 20X5 in order to
assist the directors of Xpand to make an acquisition decision. (6 marks)

KAPLAN PUBLISHING 187

You might also like