Question 1 15 Marks

One plc and Piece plc were in the same industry. The following information

appeared in their 2019 accounts:

One Piece

$m $m

Revenue 200 300

Total operating expenses 180 275

Average total assets during 2019 150 125

Required:

1. Calculate the following ratios for each company and show the numerical

relationship between them:

Their rate of return on the average total assets.

The net profit percentages.

The ratio of revenue to average total assets. (8 marks)

2. Comment on the relative performance of the two companies. (3 marks)

3. State any additional information you would require as:

A potential shareholder.

A potential loan creditor. (4 marks)Question 2 15 marks

Chopper Ltd is considering the possibility of diversifying its operations and has

identified three firms in the same industrial sector as potential takeover targets. The

following information in respect of the companies has been extracted from their most

recent financial statements.

Frank Ltd Usop Ltd Zoro Ltd

ROCE before tax % 22.1 23.7 25.0

Net profit % 12.0 12.5 3.75

Asset turnover ratio 1.45 1.16 3.73

Gross profit % 20.0 25.0 10.0

Sales/non-current assets 4.8 2.2 11.6

Sales/current assets 2.1 5.2 5.5

Current ratio 3.75 1.4 1.5

Acid test ratio 2.25 0.4 0.9

Average number of weeks

receivables outstanding 5.6 6.0 4.8

Average number of weeks inventory

held 12.0 19.2 4.0

Ordinary dividend % 10.0 15.0 30.0

Dividend cover 4.3 5.0 1.0

Required:

1. Prepare a report for the directors of Chopper Ltd, assessing the performance of the

three companies from the information provided and identifying areas which you

consider require further investigation before a final decision is made. 12 marks

2. Discuss briefly why a firms statement of financial position is unlikely to show

the true market value of the business. 3 marksQuestion 3

The following are the accounts of Big Mama plc, a company that manufactures kitchen

equipment, for the year ended 31 December 2020.

Statement of comprehensive income for years ended 31 December

2020 2019

$000 $000

Profit before interest and tax 2,200 1,570

Interest expense 170 150

Profit before tax 2,030 1,420

Taxation 730 520

Profit after tax 1,300 900

Dividends paid 250 250

Retained profit 1,050 650

Statements of financial position as at 31 December 2020

2020 2019

$000 $000

Non-current assets (written-down value) 6,350 5,600

Current assets

Inventories 2,100 2,070

Receivables 1,710 1,540

10,160 9,210

Creditors: amounts due within one year

Trade payables 1,040 1,130

Taxation 550 450

Bank overdraft 370 480

Total assets less current liabilities 8,200 7,150

Creditors: amounts due after more than one year

10% debentures 2021/2022 1,500 1,500

6,700 5,650

Capital and reserves

Share capital: ordinary shares of 50c fully paid up 3,000 3,000

Share premium 750 750

Retained earnings 2,950 1,900

6,700 5,650

The directors are considering two schemes to raise $6,000,000 in order to repay the debentures

and finance expansion estimated to increase profit before interest and tax by $900,000. It is

proposed to make a dividend of 6c per share whether funds are raised by equity or loan. The

two schemes are:

1. an issue of 13% debentures redeemable in 30 years;

2. a rights issue at $1.50 per share. The current market price is $1.80 per share

(2019: $1.50; 2018: $1.20).Required:

1. Prepare:

i. the return on equity;

ii. three ratios that a potential:

a) investor would be interested with; and

b) a long-term lender would be interested in.

iii. a brief report on the performance and state of the business using the ratios calculated

above and explain any weaknesses in these ratios. 20 marks

2. Based on your analysis above, your advice is being sought by management as to which

scheme they should adopt. Your explanation may include other information that may be

required when making the decision. 10 marksQuestion 4

Saitama plc is a food wholesale company. Its financial statements for the years ended 31

December 2018 and 2019 are as follows:

Statements of income 2019 2018

$000 $000

Sales revenue 12,000 15,000

Gross profit 3,000 3,900

Distribution costs 500 600

Administrative expenses 1,500 1,000

Operating profit 1,000 2,300

Interest receivable 80 100

Interest payable -400 -350

Profit before taxation 680 2,050

Income taxation 240 720

Profit after taxation 440 1,330

Dividends 800 600

(Loss)/profit retained -360 730

Statements of financial

position 2019 2018

$000 $000

Non-current assets:

Intangible assets 200 -

Tangible assets 4,000 7,000

Investments 600 800

4,800 7,800

Current assets:

Inventory 250 300

Trade receivables 1,750 2,500

Cash & bank 1,500 200

3,500 3,000

Total assets 8,300 10,800

Equity and reserves:

Ordinary shares of 10p each 1,000 1,000

Share premium account 1,000 1,000

Revaluation reserve 1,110 1,750

Retained earnings 3,190 3,550

6,300 7,300

Debentures 1,000 2,000

Current liabilities 1,000 1,500

Total equity and liabilities 8,300 10,800Required:

1. Describe the concerns of the following users and how reading an annual report might help

satisfy these concerns:

a. Staff 4 marks

b. Financial Institutions 4 marks

c. Owners 4 marks.

2. Calculate relevant ratios for Saitama and suggest how each of the above user groups

might react to these 28 marks.