Cameron Readers Led (continued) Financial Profile Summary 20X2 20X1 20X0 for year ending 31 March Shareholders' equity $147,675 $148,228 $163,700 Long-term liabilities $180,000 $155,000 $130,000 Current liabilities $112,952 $115,057 $112,611 Current assets $220,075 $226,500 $222,700 Non-current assets (net) $220,552 $191,785 $183,611 Number of issued shares 35,000 30,000 25,000 Katie Volumes Ltd Statistical measures for years 20X2 20X1 20X0 20X2 industry average Financial leverage multiplier 2.52 2.62 2.66 1.95 Times interest earned (times) 4.9 4.61 3.45 5.60 Inventory turnover (times) 14.75 13.39 12.24 14.50 Total assets turnover 15.95 15.82 14.97 10.85 Current ratio 1.96: 1 1.99: 1 2.07: 1 2.15: 1 Quick ratio 1.56: 1 1.75: 1 1.97: 1 1.55: 1 Net profit margin (%) 15.60% 13.40% 12.50% 16.25% Financial Profile Summary 20X2 20X1 20X0 for years ending 31 March Shareholders' equity $185,450 $169,000 $165,000 Long-term liabilities $156,000 $160,000 $150,000 Current liabilities $126,000 $113,140 $124,750 Current assets $247,060 $225,623 $258,905 Non-current assets (net) $220,390 $216,517 $180,845 Number of issued shares 50,000 50,000 50,000 Required a Discuss the importance of carefully using financial information for investment decision making. b Prepare a report for your parents analysing the profitability, asset management, financial structure and liquidity of both companies and for the industry in 202. Make a clear recommendation to your parents as to which company is the better investment. Use the financial information provided in the statistical measures and financial profile tables. You do not need to calculate any other financial ratios for this part of the question.12 Financial analysis The firms Cameron Readers Led and Katie Volumes Led are both located on a university campus and have been operating for three years. Your parents are interested in investing in ONE of the two businesses and do not see any practical difficulties in managing a bookshop business. They are unsure which one of the two companies will provide the better return on investment. They have approached you for advice. Cameron Readers Lid Statistical measures for 20X2 20X1 20X0 20X2 years industry average Financial leverage multiplier 2.98 2.82 2.48 1.95 Times interest earned (times) 3.85 4.1 4.8 5.6 Inventory turnover (times) 7.4 10.9 7.5 14.5 Total assets turnover 8.55 10.2 9.1 10.85 Current ratio 1.95: 1 1.97:1 1.98: 1 2.15: 1 Quick ratio 1.10:1 1.65: 1 1.88: 1 1.55: 1 Net profit margin (%) 9.97% 12.45% 10.28% 16.25%c The statistical measures tables provide no indication about the return on assets or the return on equity. Your parents are concerned about whether better profitability information would be provided by these ratios. They would like to know what the return on equity ratios have been over the three years compared with the 20X2 industry average. Use the Du Pont profitability model to work out the return on equity trend over the three-year period for both companies and for the industry in 20X2. Clearly set out this calculation in a table. How would this additional information affect your earlier recommendation in requirement b? d The asking price for the shares in Cameron Readers Led has been indicated as $6.60 per share, and for the shares in Katie Volumes Led at $5.20 per share. The director/ shareholder owners of the companies feel that they have built significant goodwill with the student market and that their success has been incorporated into the asking prices. Your parents have approached you for further advice. i Calculate the 20X2 net asset backing per share business valuations for the two companies. ii Determine the goodwill that your parents will be paying for Cameron Readers Ltd and Katie Volumes Led if they were to purchase either of these two companies. ifi Write a brief report to your parents explaining whether they should pay the asking price for the shares of two companies. e Your advice to your parents has focused mainly on the provided financial information. Explain to your parents the limitations of doing this and identify other information that you should have also used before making your recommendations