Hanna plc. is a Zambian owned company operating in the financial sector. Hanna plc has an ambitious expansion program and the minutes for the recently held board of directors meeting indicates that the company intends to wholly acquire a suitable private company to achieve the goal. Hanna plc has obtained the financial statements for Gamma Limited a targeted company for acquisition and the management of this company is keen for the takeover. The financial statements for Gamma Limited are presented below: Statement of profit or loss and other comprehensive income for the year ended 31 December 2021 K000 K000 Revenue 10,250 Cost of sales (9,000) Gross profit 1,250 Operating expenses (250) Finance costs: - Loan (150) - Lease (145) - Overdraft (5) Profit before tax 700 Income tax expense (200) Profit after tax 500 Dividends paid during the year 350 Statement of financial position as at 31 December 2021 Non-current assets: Owned plant - (i) 1,100 Leased plant note (ii) 2,650 3,750 Current assets: Inventory 1,800 Trade receivables 1,850 3,650 Total assets 7,400 Equity and liabilities: Equity shares of K1 each 1,000 Retained earnings 400 1,400 Non-current liabilities: Finance lease obligations note (iv) 1,600 Page 2 of 2 10% loan notes 1,500 Deferred tax 50 3,150 Current liabilities: Bank overdraft 600 Trade payables 1,900 Taxation 100 Finance lease obligations note (iv) 250 2,850 Total equity and liabilities 7,400 Notes: (i) Gamma Limiteds owned plant at cost is K5 million (ii) Gamma Limited leased plant at original fair value is K3.75 million. (iii) There were no disposals of plant during the year. (iv) The interest rate implicit within Gamma Limiteds finance leases is 7.5% per annum. For the purpose of calculating ROCE and gearing, all finance lease obligations are treated as long-term interest bearing borrowings. (v) The following industry ratios have been calculated. These ratios relate to the industry in which Gamma Limited operates in. Return on capital employed (ROCE) 14.8% Pre-tax return on equity (ROE) 19.1% Net asset turnover 1.2 times Gross profit margin 12.5% Operating profit margin 10.5% Current ratio 1.2:1 Closing inventory holding period 70 days Trade receivables collection period 73 days Trade payables payment period 108 days Gearing 35.3% Interest cover 6 times Dividend cover 3.6 times Required: (a) Calculate for Gamma Limited the ratios equivalent to the industry averages above. (8 marks) (b) Assess the relative performance and financial position of Gamma Limited for the year ended 31 December 2021 to inform the directors of Hanna Plc in their acquisition. (12 marks) (c) Explain the limitations of ratio analysis.