NUMBER ONE Baru Ltd., publishing and printing company, extracted the following trial balance as at 31 October 2005: Property, plant and equipment: Cost depreciation Intangible assets Inventory Accounts receivable Provision for doubtful debts Cash in hand Accounts payable Bank overdraft 12% debentures Bank loan Corporation tax Share capital Retained profits Sales Cost of sales Salaries and wages Distribution cost Administrative expenses Interest charges Accumulated Sh. '000' Sh. '000' 907,722 108,000 120,000 120,700 168,120 620 100 127,450 50,754 200,000 270,000 47,500 60,000 119,046 1,574,500 670,396 238,720 86,560 165,592 79,960 2.555.870 2.557.870 Additional Information 1. Details of property, plant and equipment were as follows: Values as at 1 November 2004 Cost Accumulated depreciation Sh. '000' Sh. '000' Freehold property (land Sh.350 million) 500,000 Plant and machinery 200,000 90,000 Office equipment 107,722 18,000 807.722 108.000 The company had not been providing for depreciation on freehold property which comprised land and buildings. These were acquired on 1 November 1995, on which date the buildings were estimated to have a useful life of 50 years. The directors have now agreed to provide depreciation from the date of acquisition. Depreciation on the other items of property, plant and equipment is to be provided for as follows: Plant and machinery 15% on straight line basis Office equipment -10% on reducing balance basis A plant which cost Sh.100 million was acquired during the year. 2. The cost of inventory as at 31 October 2005 included items valued at Sh.9.6 million that were considered to be obsolete. The remaining inventory had a value of Sh.111.1 million. 3. Provision for doubtful debts at 5% of the accounts receivable is to be made. 4. The bank loan is repayable in ten equal annual installments of Sh.30 million. 5. The corporation tax amounting to Sh.47.5 million represents the estimated tax charge for the previous year. This liability was agreed with the tax authority at Sh.45 million. Current year tax is estimated to be Sh.85 million. 6. The details of salaries and wages were: Sh. '000' Factory wages Warehouse wages Office salaries Directors' remuneration The interest charges comprise: 125,510 32,716 79,780 714 238,720 Sh. '000' Bank overdraft interest 25,460 Bank loan interest 42,000 12,500 79,960 12% debenture interest Intangible assets are to be amortised over 5 years. Amortisation and depreciation charges are to be treated as part of the cost of sales. The directors propose to pay dividend amounting to Sh.21 million in respect of the year ended 31 October 2005. Required: a) Income statement for the year ended 31 October 2005. (8 marks) (2 marks) b) Statement of changes in equity for the year ended 31 October 2005. (show the column for retained profits only). c) Balance sheet as at 31 October 2005. Include relevant notes, using only the information provided, to ensure that the financial statements meet the requirements of International Financial Reporting Standards (IFRSS). (12 marks) (Total: 22 marks) The following data are pertinent for companies A and B. Present Earnings No of shares Price/earning ratio Shs 20 million 10 million 18 B Shs 4 million 1 million 10 a. b. c. d. If the two companies were to merge and the exchange ratio were one share of Company A for each share of Company B, what would be the initial impact on earnings per share of the two companies? what is the market value exchange ratio? Is the merger likely to take place? If the exchange ratio were two shares of Company A for each share of Company B what would happen with respect to the above? If the exchange ratio were 1.5 shares of Company A for each share of Company B, what would happen? What exchange ratio would you recommend? X Ltd intends to take-over Y Ltd by offering two of its share for every five shares in Y Company Ltd. Relevant financial data is as follows: X Ltd EPS Shs 2 Market price per share Shs 100 Price earnings ratio 50 No. of shares Total earnings 100,000 Shs 200,000 Total market value Shs 10,000,000 REQUIRED: a. b. Compute the combined EPS & MPS Has wealth been created for shareholders? Y Ltd Shs 2 Shs 40 20 250,000 Shs 500,000 Shs 10,000,000 The management of Kinyongoro Publishers has estimated the following net cashflows and probabilities for a new printing process. Year Net Cashflows P=0.2 P = 0.6 P = 0.2 11234+ 10 to 0 (100,000) (100,000) (100,000) 20,000 30,000 40,000 20,000 30,000 40,000 20,000 30,000 40,000 20,000 30,000 40,000 5 5* 20,000 30,000 40,000 0 20,000 30,000 Year 0 is the cost of the new process and Year 5* is the estimated salvage value. The cost of capital for a project of average risk is 10% p.a. Required: (a) Assuming that the above project has average risk, compute the projects base case net present value (NPV). (12 marks) (b) Assume that all cashflows are positively perfectly correlated (i.e. there is only three possible cashflow scenarios over time namely worst case, most probable case and best case with probabilities 0.2, 0.6 and 0.2 respectively). (c) Find the projects expected NPV, standard deviation and coefficient of variation. Should the project be accepted? (8 marks) (2 marks) (Total 22 marks)