Question 1 Southern Development Ltd plans to construct a residential building. The project will cost $500 m and take 18 months to complete. Following a tendering exercise the company has decided to award the contract to one of two construction companies, Preston Ltd or Lumby Ltd. Both companies are of a similar size and prepare financial statements to 30 September each year. You are provided with the following accounting information which has been obtained from the financial statements for the year ending 30 September 2016: Year ended 30 September 2016 Preston Lumby 13% 12% Profitability 1 Return on capital employed 2 Gross profit 3 Operating profit as a % of revenue 48% 32% 11% 18% Efficiency and liquidity 4 Average inventory days 5 Average trade payables days 6 Average trade receivables days 7 Cash and cash equivalents (net) 8 Asset turnover (times) 115 days 36 days 31 days 31 days 64 days 27 days ($400,000) $1,200,000 0.73 1.09 $0.135 Investment 9 Earnings per share 10 Dividend cover (times) 11 Dividend per share $0.74 0.74 $1.0 2.7 . $0.05 Capital structure 12 Leverage 13 Interest cover (times) 14 Revenue ($000's) 47% 2.09 124,500 12% 11.5 99,600 Required: Using the information above prepare a report to the Chief Executive Officer of Southern Development Ltd which: (a) evaluates the financial performance of both companies; (13 marks) (b) recommends which company should be selected to construct the residential building; (3 marks) (c) indicates four limitations in your analysis. (4 marks)