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Question 3 (30%) Xpand is a publicly listed company which has experienced rapid growth in recent years through the acquisition and integration of other companies. Xpand is interested in acquiring Hydan, a retailing company, which is one of several companies owned and managed by the same family. The summarised financial statements of Hydan for the year ended 30 September 2014 are: Statement of financial position $'000 $'000 Assets Non-current assets Property, plant and equipment 32,400 Current assets Inventory 7,500 Bank 100 7,600 Total assets 40,000 Equity and liabilities Equity Equity shares of $1 each Retained earnings 1,000 18,700 19,700 Non-current liabilities Page 7 10,000 Directors' loan accounts (interest free) Current liabilities Trade payables Current tax payable 7,500 2,800 10,300 40,000 Total equity and liabilities Statement of profit or loss Revenue Cost of sales Gross profit Operating costs Directors' salaries Profit before tax Income tax expense Profit for the year $'000 70,000 (45,000) 25,000 (7,000) (1,000) 17,000 (3,000) 14,000 From the above financial statements, Xpand has calculated for Hydan the ratios below for the year ended 30 September 2014. It has also obtained the equivalent ratios for the retail sector average which can be taken to represent Hydan's sector. Return on equity (ROE) (including directors' loan accounts) Net asset turnover Gross profit margin Net profit margin Hydan 47.1% 2-36 times 35.7% 20.0% Sector average 22.0% 1.67 times 30-0% 12.0% From enquiries made, Xpand has learned the following information: 1. Hydan buys all of its trading inventory from another of the family companies at a price which is 10% less than the market price for such goods. II. After the acquisition, Xpand would replace the existing board of directors and need to pay remuneration of $2.5 million per annum. III. The directors' loan accounts would be repaid by obtaining a loan of the same amount with interest at 10% per annum. IV. Xpand expects the purchase price of Hydan to be $30 million. Required: (a) Recalculate the ratios for Hydan after making appropriate adjustments to the financial statements for notes (1) to (iv) above. For this purpose, the expected purchase price of $30 million should be taken as Hydan's equity and net assets are equal to this equity plus the loan. You may assume the changes will have no effect on taxation. Page 8 (b) In relation to the ratios calculated in (a) above, and the ratios for Hydan given in the question, comment on the performance of Hydan compared to its retail sector average. (Total: 30 marks)