Question 1 The scenario Alphabet Holdings Plc wants to diversify its portfolio of investments in subsidiary companies. It already owns a haulage company with a fleet of 150 heavy goods vehicles (HGV), chain of fast-food restaurants, and 6 hotels, one of which is making a loss. They have identified 2 possible acquisition targets and want you to complete the ratio analysis, evaluate the findings, and advise them on which one they should acquire and why. They have identified 2 young companies that are both 2 years old and growing rapidly. They are very different in what they do: ABC Ltd is based in 2 leased converted hotels and provides care services for young people unable to be cared for in the foster system. Alphabet Holdings Plc are looking into the possibility of converting their failing hotel into a provider of care services and ABC is looking for another property; XYZ Ltd has a large yard and caters for the storage and repair of up to 50 commercial vehicles at one time, and has the potential for more space as it is based in a large empty industrial area. XYZ is looking for a contract with a fleet operator to stabilise their income and growth. Both target companies are 2 years old and here are extracts from their financial statements: Statements of Profit or Loss (SOPL) ABC CARE SERVICES XYZ VEHICLE Ltd SERVICES Ltd vertical analysis vertical analysis Turnover 308,456 100% 251,790 100% f Cost of sales (195,949) 63.53% (93,963) 37.32% Gross profit 112,507 36.47% 157,827 62.68% 33.34% Administrative expenses Other operating income (61,258) 3,005 19.86% -0.97% (83,953) 0 0.00% Operating profit 54,254 17.59% 73,874 29.34% Other interest receivable and similar income Interest payable and similar charges 301 0 0.10% 0.00% 377 (7,701) 0.15% 3.06% Profit on ordinary activities before taxation 54,555 17.69% 66,550 26.43% Tax on profit on ordinary activities (7,881) 2.55% (12,645) 5.02% Profit for the year 46,674 15.13% 53,906 21.41% Statements of Financial Position (SoFP) ABC CARE SERVICES Ltd vertical analysis Fixed assets Tangible assets 0.9% XYZ VEHICLE SERVICES Ltd vertical analysis 776 48,591 27.2% Total Non Current Assets 776 0.9% 48,591 27.2% Current assets Trade receivables Cash at bank and in hand 15,635 67,771 18.6% 80.5% 57,055 73,232 31.9% 40.9% = Total Current Assets 83,406 99.1% 130,287 72.8% Total Assets 84, 182 100.0% 178,878 100.0% Liabilities Current liability: Trade payables 51,806 61.5% 30,736 17.2% Non current liability: Bank borrowing 0 0.0% 74,267 41.5% Total Liabilities 51,806 61.5% 105,003 58.7% Equity and reserves Called up share capital Profit and loss account 3 0.0% 2 0.0% 32,373 38.5% 73,873 41.3% Total Equity 32,376 38.5% 73,875 41.3% Total Equity and Liabilities 84,182 100.0% 178,878 100.0% The ratio analysis below is in 4 categories (Profitability, Liquidity, Management Efficiency, and Gearing), but is incomplete: Formulae ABC CARE XYZVEHICLE SERVICES SERVICES Ratios Profitability Ratios ROCE % 64% 41% PBIT Cap Employed Return on Assets % 64% ? PBIT Total Assets Asset Turnover 3.7 Revenue Total Assets Gross Profit Margin % 36.5% ? Gross profit Revenue Net Profit Margin % 18% ? PBIT Revenue Efficiency Ratios Receivables Collection period (R) x 365 days 19 ? Trade receivables Sales Payables payment period (P) x 365 days 97 ? Trade payables Cost of sales R-F Cash Cycle days -78 ? Liquidity Ratios Current Ratio X:1 1.6 ? Current Assets Current liabilities Financial Risk or GEARING Ratios Gearing % 0.0% ? Fixed int capital Total capital employed Interest cover ratio % 0.0 ? PBIT Interest charges Page 6 of 11 Requirements 1.1 Prepare a business report, maximum 2 pages long (+/- 10%), to the board of directors of Alphabet Holdings Plc using ratio analysis. Your 400-word report must evaluate the financial statements and ratio analysis and make a convincing argument for investment in one of the two target companies. Your analysis, conclusions and recommendations should be supported with academic references. (400 words, 30 marks) 1.2 Critically evaluate the working capital management (WCM) of both companies and draw conclusions on which is stronger. (200 words, 5 marks) 1.3 What sources of finance should Alphabet Holdings Plc consider to finance the investment in either ABC Ltd or XYZ Ltd? Critically evaluate the options you have identified and make a well-reasoned, and well-referenced, conclusion and recommendation. (200 words, 5 marks) Question 1 The scenario Alphabet Holdings Plc wants to diversify its portfolio of investments in subsidiary companies. It already owns a haulage company with a fleet of 150 heavy goods vehicles (HGV), chain of fast-food restaurants, and 6 hotels, one of which is making a loss. They have identified 2 possible acquisition targets and want you to complete the ratio analysis, evaluate the findings, and advise them on which one they should acquire and why. They have identified 2 young companies that are both 2 years old and growing rapidly. They are very different in what they do: ABC Ltd is based in 2 leased converted hotels and provides care services for young people unable to be cared for in the foster system. Alphabet Holdings Plc are looking into the possibility of converting their failing hotel into a provider of care services and ABC is looking for another property; XYZ Ltd has a large yard and caters for the storage and repair of up to 50 commercial vehicles at one time, and has the potential for more space as it is based in a large empty industrial area. XYZ is looking for a contract with a fleet operator to stabilise their income and growth. Both target companies are 2 years old and here are extracts from their financial statements: Statements of Profit or Loss (SOPL) ABC CARE SERVICES XYZ VEHICLE Ltd SERVICES Ltd vertical analysis vertical analysis Turnover 308,456 100% 251,790 100% f Cost of sales (195,949) 63.53% (93,963) 37.32% Gross profit 112,507 36.47% 157,827 62.68% 33.34% Administrative expenses Other operating income (61,258) 3,005 19.86% -0.97% (83,953) 0 0.00% Operating profit 54,254 17.59% 73,874 29.34% Other interest receivable and similar income Interest payable and similar charges 301 0 0.10% 0.00% 377 (7,701) 0.15% 3.06% Profit on ordinary activities before taxation 54,555 17.69% 66,550 26.43% Tax on profit on ordinary activities (7,881) 2.55% (12,645) 5.02% Profit for the year 46,674 15.13% 53,906 21.41% Statements of Financial Position (SoFP) ABC CARE SERVICES Ltd vertical analysis Fixed assets Tangible assets 0.9% XYZ VEHICLE SERVICES Ltd vertical analysis 776 48,591 27.2% Total Non Current Assets 776 0.9% 48,591 27.2% Current assets Trade receivables Cash at bank and in hand 15,635 67,771 18.6% 80.5% 57,055 73,232 31.9% 40.9% = Total Current Assets 83,406 99.1% 130,287 72.8% Total Assets 84, 182 100.0% 178,878 100.0% Liabilities Current liability: Trade payables 51,806 61.5% 30,736 17.2% Non current liability: Bank borrowing 0 0.0% 74,267 41.5% Total Liabilities 51,806 61.5% 105,003 58.7% Equity and reserves Called up share capital Profit and loss account 3 0.0% 2 0.0% 32,373 38.5% 73,873 41.3% Total Equity 32,376 38.5% 73,875 41.3% Total Equity and Liabilities 84,182 100.0% 178,878 100.0% The ratio analysis below is in 4 categories (Profitability, Liquidity, Management Efficiency, and Gearing), but is incomplete: Formulae ABC CARE XYZVEHICLE SERVICES SERVICES Ratios Profitability Ratios ROCE % 64% 41% PBIT Cap Employed Return on Assets % 64% ? PBIT Total Assets Asset Turnover 3.7 Revenue Total Assets Gross Profit Margin % 36.5% ? Gross profit Revenue Net Profit Margin % 18% ? PBIT Revenue Efficiency Ratios Receivables Collection period (R) x 365 days 19 ? Trade receivables Sales Payables payment period (P) x 365 days 97 ? Trade payables Cost of sales R-F Cash Cycle days -78 ? Liquidity Ratios Current Ratio X:1 1.6 ? Current Assets Current liabilities Financial Risk or GEARING Ratios Gearing % 0.0% ? Fixed int capital Total capital employed Interest cover ratio % 0.0 ? PBIT Interest charges Page 6 of 11 Requirements 1.1 Prepare a business report, maximum 2 pages long (+/- 10%), to the board of directors of Alphabet Holdings Plc using ratio analysis. Your 400-word report must evaluate the financial statements and ratio analysis and make a convincing argument for investment in one of the two target companies. Your analysis, conclusions and recommendations should be supported with academic references. (400 words, 30 marks) 1.2 Critically evaluate the working capital management (WCM) of both companies and draw conclusions on which is stronger. (200 words, 5 marks) 1.3 What sources of finance should Alphabet Holdings Plc consider to finance the investment in either ABC Ltd or XYZ Ltd? Critically evaluate the options you have identified and make a well-reasoned, and well-referenced, conclusion and recommendation. (200 words, 5 marks)