1. An institutional investor plans to buy 20% of the equity shares in TLW, a private. You have been engaged to analyze the stocks value and offer an advice on an appropriate bid price. You gathered the recent financial statements of the target company:

Total dividends for the 20x4 financial year is GHS 512,000. Required rate of return on the equity stock of TLW is estimated to be 18%.

Required:

(a) Compute the companys degree of operating leverage (DOL) and degree of financial leverage (DFL).

TLW Income statement for the year ending Dec 20x4 GHS'000 Sales revenue 25,000 Cost of sales (12,000) Gross profit 13,000 Selling and distribution expenses (6,200) Administrative expenses (2,400) Operating profit 4,400 Finance costs (1,200) Net income before tax 3,200 | (640) Net income 2,560 TLW Statement of financial position as at Dec 20x4 Assets GHS'000 Property, plant and equipment 50,000 Current assets 25,100 75,100 Equity: Stated capital (2 million shares) 18,000 Income surplus (retained earnings) 27,600 Shareholders' fund 45,600 Liabilities: 5-year bank loan 8,000 Current liabilities 21,500 Total liabilities 29,500 Total equity and liabilities 75,100