Question 1 Wyatt plc has operated in the scientific research sector for many years. Wyatt plc is considering the acquisition of Haverford Ltd. Extracts from Haverford Ltd's most recent financial statements can be seen below. Statement of profit or loss for the year ended 31 December 2019 2018 000 000 Revenue 27,300 18,300 Cost of sales (16,920) (21,350) Gross profit 10,380 (3,050) Operating expenses (4.320) (3,120) Operating profit 6,060 (6,170) Finance costs (980) (1.500) Profit/loss before tax 5,080 (7,670) Taxation (1,540) 1,500 Profit for the year 3,540 (6,170) Statement of financial position extracts as at 31 December 2019 000 Non-current assets Intangible assets 15,300 2018 000 8,200 Current assets Inventories Receivables Cash 7,300 6,500 11,100 5.100 3.100 6.230 Equity Ordinary share capital (E1) Share premium Retained earnings Total equity 50,000 25,000 (7.660) 67,340 30,000 16,000 (11.200) 34,800 Non-current liabilities Long-term loans 5,200 11,000 Statement of cash flow extracts as at 31 December 2019 Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities E000 (3.730) (7.300) 15,900 Haverford Ltd is a new research company currently owned by Ludgate plc, a large pharmaceutical company. Haverford Ltd made losses in the first few years of its operations. This was due to heavy investment in research into new technologies and pharmaceuticals. Research costs are written off to the statement of profit or loss when incurred as part of cost of sales. When an item was shown to be economically viable, then costs are capitalised as an intangible asset from this point onwards. Following guidance from Ludgate plc, Haverford Ltd capitalised a significant number of costs as intangible assets this year. The losses in the first few years were underwritten by a large investment in shares from Ludgate plc. In addition to this, Ludgate plc provided Haverford Ltd with an 10 million loan. During the year, Haverford Ltd issued 5 million shares to Ludgate plc to settle half of the loan. All other share issues raised cash to invest in the development process. Since its inception, Ludgate plc has been Haverford Ltd's main customer, and Haverford Ltd rented premises from Ludgate plc at a reduced rate. During the year, Haverford Ltd made a significant breakthrough in a new skincare product, SparkleSkin. This led to an increase in orders from a number of new retail clients, who were offered generous payment terms in order to sell the product in their stores. After this, the managing director was promoted to the board of Ludgate plc. Haverford Ltd have not yet replaced the managing director. Haverford Ltd have started to apply for a number of research grants from the government in 2020. If successful, this would result in the receipt of a 8 million grant to develop further products. A recent response from the government has stated that Haverford do not yet qualify, as Haverford Ltd has not demonstrated that its new products are technically feasible. Requirement: (a) Calculate the following ratios for Haverford Ltd for the years ended 31 December 2018 and 2019: Grosofit margin Ope profit margin Return on capital employed Trade receivable collection period Inventory tumover period Gearing (Debt/Debt plus Equity) (8 marks) (b) Write a report to the directors of Wyatt plc analysing the performance, position and liquidity of Haverford Ltd. Your answer should provide a recommendation of whether or not to acquire Haverford Ltd, and any concerns with purchasing it from Ludgate plc. (25 marks) Total: (33 marks)