Please answer all questions accurately.
Question #3 DM, a listed entity, has just published its financial statements for the year ended 31 December 2004. DM operates a chain of 42 supermarkets in one of the six major provinces of its country of operation. During 2004, there has been speculation in the financial press that the entity was likely to be a takeover target for one of the larger national chains of supermarkets that is currently under- represented in DM's province. A recent newspaper report has suggested that DM's directors are unlikely to resist a takeover. The six board members are all nearing retirement, and all own significant minority shareholdings in the business. You have been approached by a private shareholder in DM. She is concerned that the directors have a conflict of interests and that the financial statements for 2004 may have been manipulated. The income statement and summarised statement of changes in equity of DM, with comparatives, for the year ended 31 December 2004, and a balance sheet, with comparatives, at that date are as follows: 78 75 DM: Income statement for the year ended 31 December 2004 2004 2003 $m Sm Revenue, net of sales tax 1,255 1,220 Cost of sales (1,177) (1,145) Gross profit Operating expenses (21) (29) Profit from operations 57 Finance cost Profit before tax Income tax expense Profit for the period 33 (10) (10) 47 (14) (13) 23 DM: Summarised statement of changes in equity for the year ended 31 December 2004 2004 2003 $m $m Opening balance 276 Profit for the period 23 Dividends (8) (8) Closing balance 301 261 33 276 DM: Balance sheet at 31 December 2004 2004 2003 Sm Sm Sm Sm Non-current assets: Property, plant and equipment Goodwill Current assets: Inventories Trade receivables Cash Equity: Share capital Accumulated profits Non-current liabilities: Interest-bearing borrowing Deferred tax 142 Current liabilities: Trade and other payables Short-term borrowings Notes: DM's directors have undertaken a reassessment of the useful lives of non-current tangible assets during the year. In most cases, they estimate that the useful lives have increased and the depreciation charges in 2004 have been adjusted accordingly. Six new stores have been opened during 2004, bringing the total to 42. Four key ratios for the supermarket sector (based on the latest available financial statements of twelve listed entities in the sector) are as follows: 2 3. (0) Annual sales per store: $27.6m (ii) Gross profit margin: 5.9% (ii) (iv) Net profit margin: 3.9% Non-current asset turnover (including both tangible and intangible non-current assets): 1.93 Required: (a) Prepare a report, addressed to the investor, analyzing the performance and position of DM based on the financial statements and supplementary information provided above. The report should also include comparisons with the key sector ratios, and it should address the investor's concerns about the possible manipulation of the 2004 financial statements. Try and use as many ratios as you possibly can. (b) Explain the limitations of the use of sector comparatives in financial analysis. Question #3 DM, a listed entity, has just published its financial statements for the year ended 31 December 2004. DM operates a chain of 42 supermarkets in one of the six major provinces of its country of operation. During 2004, there has been speculation in the financial press that the entity was likely to be a takeover target for one of the larger national chains of supermarkets that is currently under- represented in DM's province. A recent newspaper report has suggested that DM's directors are unlikely to resist a takeover. The six board members are all nearing retirement, and all own significant minority shareholdings in the business. You have been approached by a private shareholder in DM. She is concerned that the directors have a conflict of interests and that the financial statements for 2004 may have been manipulated. The income statement and summarised statement of changes in equity of DM, with comparatives, for the year ended 31 December 2004, and a balance sheet, with comparatives, at that date are as follows: 78 75 DM: Income statement for the year ended 31 December 2004 2004 2003 $m Sm Revenue, net of sales tax 1,255 1,220 Cost of sales (1,177) (1,145) Gross profit Operating expenses (21) (29) Profit from operations 57 Finance cost Profit before tax Income tax expense Profit for the period 33 (10) (10) 47 (14) (13) 23 DM: Summarised statement of changes in equity for the year ended 31 December 2004 2004 2003 $m $m Opening balance 276 Profit for the period 23 Dividends (8) (8) Closing balance 301 261 33 276 DM: Balance sheet at 31 December 2004 2004 2003 Sm Sm Sm Sm Non-current assets: Property, plant and equipment Goodwill Current assets: Inventories Trade receivables Cash Equity: Share capital Accumulated profits Non-current liabilities: Interest-bearing borrowing Deferred tax 142 Current liabilities: Trade and other payables Short-term borrowings Notes: DM's directors have undertaken a reassessment of the useful lives of non-current tangible assets during the year. In most cases, they estimate that the useful lives have increased and the depreciation charges in 2004 have been adjusted accordingly. Six new stores have been opened during 2004, bringing the total to 42. Four key ratios for the supermarket sector (based on the latest available financial statements of twelve listed entities in the sector) are as follows: 2 3. (0) Annual sales per store: $27.6m (ii) Gross profit margin: 5.9% (ii) (iv) Net profit margin: 3.9% Non-current asset turnover (including both tangible and intangible non-current assets): 1.93 Required: (a) Prepare a report, addressed to the investor, analyzing the performance and position of DM based on the financial statements and supplementary information provided above. The report should also include comparisons with the key sector ratios, and it should address the investor's concerns about the possible manipulation of the 2004 financial statements. Try and use as many ratios as you possibly can. (b) Explain the limitations of the use of sector comparatives in financial analysis
