Amekom Plc 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, Bordiem Plc and Apim Plc. They operate in the same industry and their managements have indicated that they would be receptive to a takeover.

Statements of Profit or Loss for the year ended 31st December, 2020

Revenue Cost of sales

Gross profit Operating expenses Finance costs loan overdraft

lease

Profit before tax Income tax expense

Profit for the year

Note: dividends paid during the year

Bordiem Plc GH000 12,000 (10,500)

1,500 (240) (210) nil

nil 1,050 (150)

900

250

Apim Plc GH000 20,500

(18,000)

2,500 (500)

(300) (10) (290) 1,400

(400)

1,000 700

Statements of financial position as at 31st December, 2020

Assets

Non-current assets Freehold factory (note(i)) Owned plant (note (ii)) Leased plant (note (ii))

Current assets Inventory

Trade receivables Bank

Total assets

Equity and liabilities

Equity shares of GH1 each Property revaluation reserve Retained earnings

Non-current liabilities

Finance lease obligations (note (iii)) 7% loan notes

10% loan notes

Deferred tax

Government grants

Current liabilities

Bank overdraft

Trade payables

Government grants

Finance lease obligations (note (iii)) Taxation

4,400 5,000

nil

9,400

2,000 2,400 600

---------- 5,000

14,400

2,000 900 2,600

5,500

nil 3,000

nil 600

1,200 -------- 4,800 --------

nil 3,100

400 nil

600 4,100 ------------

nil 2,200 5,300

7,500

3,600 3,700 nil

---------- 7,300

14,800

2,000 nil

800 2,800

3,200 nil 3,000

100 nil

---------- 6,300

---------

1,200 3,800 nil

500

200

5,700 ----------

Total equity and liabilities 14,400 14,800

(ii) Additional details of the two companies plant are:

Notes

(i) Both companies operate from similar premises.

GH000 Owned plant cost 8,000

Leased plant original fair value nil

There were no disposals of plant during the year by either company.

(iii) The interest rate implicit within ABC Plcs finance leases is 75% 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 Bordiem Plc and can be taken to be correct:

Return on year end capital employed (ROCE) (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

You are required to:

7,500

148%

191%

12 times 125%

105% 12:1

70 days

73 days 108 days

353%

6 times

36 times

(a) Calculate for Apim Plc the ratios equivalent to all those given for Bordiem Plc above. 6 marks

(b) Assess the relative performance and financial position of Bordiem Plc and Apim Plc for the year ended 30 September 2020 to inform the directors of Amekom Plc in their acquisition decision.

10 marks

Bordiem Plc

Apim Plc GH000 10,000

(c) Explain the limitations of ratio analysis and any further information that may be useful to the directors of Amekom Plc when making an acquisition decision.