Question 3 Amekom Plc is a public company that would like to acquire (100% of) a suitable private company. It has obtained the following draft financial statements for two companies, Bordiem Plc and Apim Plc. They operate in the same industry and their managements have indicated that they would be receptive to a takeover. Statements of Profit or Loss for the year ended 31st December, 2020 Bordiem Plc Apim Plc GH'000 GH'000 Revenue 12,000 20,500 Cost of sales (10,500) (18,000) Gross profit Operating expenses Finance costs - loan - overdraft - lease 1,500 (240) (210) 2,500 (500) (300) (10) (290) nil nil Profit before tax Income tax expense 1,050 (150) 1,400 (400) Profit for the year 900 1,000 Note: dividends paid during the year 250 700 Statements of financial position as at 31st December, 2020 Assets Non-current assets Freehold factory (note(i)) 4,400 Owned plant (note (ii)) 5,000 Leased plant (note (ii)) nil nil 2,200 5,300 2.400 7.500 Current assets Inventory Trade receivables Bank 2,000 2,400 600 3,600 3,700 nil 5,000 7,300 Total assets 14,400 14,800 Equity and liabilities Equity shares of GH1 each Property revaluation reserve Retained earnings 2,000 900 2,600 2,000 nil 800 5,500 2,800 Non-current liabilities Finance lease obligations (note (iii)) 7% loan notes 10% loan notes Deferred tax Government grants nil 3,000 nil 600 1,200 3,200 nil 3,000 100 nil 4,800 6,300 1,200 3,800 Current liabilities Bank overdraft Trade payables Government grants Finance lease obligations (note (iii)) Taxation nil 3,100 400 nil 600 nil 500 200 4,100 5,700 (c) Explain the limitations of ratio analysis and any further information that may be useful to the directors of Amekom Plc when making an acquisition decision. 4 marks Total equity and liabilities 14,400 14,800 Notes (1) Both companies operate from similar premises. (ii) Additional details of the two companies' plant are: Bordiem Plc Apim Plc GH'000 GH'000 Owned plant - cost 8,000 10,000 Leased plant - original fair value nil 7,500 There were no disposals of plant during the year by either company. (iii) The interest rate implicit within ABC Pic's finance leases is 7-5% per annum. For the purpose of calculating ROCE and gearing, all finance lease obligations are treated as long-term interest-bearing borrowings: (iv) The following ratios have been calculated for Bordiem Plc and can be taken to be correct: Return on year end capital employed (ROCE) 14.8% (capital employed taken as shareholders' funds plus long-term interest bearing borrowings - see note (iii) above) Pre-tax return on equity (ROE) 19.1% Net asset (total assets less current liabilities) turnover 1-2 times Gross profit margin 12.5% Operating profit margin 10-5% Current ratio 1-2:1 Closing inventory holding period 70 days Trade receivables' collection period 73 days Trade payables' payment period (using cost of sales) 108 days Gearing (see note (iii) above) 35-3% Interest cover 6 times Dividend cover 3-6 times You are required to: (a) Calculate for Apim Plc the ratios equivalent to all those given for Bordiem Plc above. 6 marks (b) Assess the relative performance and financial position of Bordiem Plc and Apim Plc for the year ended 30 September 2020 to inform the directors of Amekom Plc in their acquisition decision. 10 marks Question 3 Amekom Plc is a public company that would like to acquire (100% of) a suitable private company. It has obtained the following draft financial statements for two companies, Bordiem Plc and Apim Plc. They operate in the same industry and their managements have indicated that they would be receptive to a takeover. Statements of Profit or Loss for the year ended 31st December, 2020 Bordiem Plc Apim Plc GH'000 GH'000 Revenue 12,000 20,500 Cost of sales (10,500) (18,000) Gross profit Operating expenses Finance costs - loan - overdraft - lease 1,500 (240) (210) 2,500 (500) (300) (10) (290) nil nil Profit before tax Income tax expense 1,050 (150) 1,400 (400) Profit for the year 900 1,000 Note: dividends paid during the year 250 700 Statements of financial position as at 31st December, 2020 Assets Non-current assets Freehold factory (note(i)) 4,400 Owned plant (note (ii)) 5,000 Leased plant (note (ii)) nil nil 2,200 5,300 2.400 7.500 Current assets Inventory Trade receivables Bank 2,000 2,400 600 3,600 3,700 nil 5,000 7,300 Total assets 14,400 14,800 Equity and liabilities Equity shares of GH1 each Property revaluation reserve Retained earnings 2,000 900 2,600 2,000 nil 800 5,500 2,800 Non-current liabilities Finance lease obligations (note (iii)) 7% loan notes 10% loan notes Deferred tax Government grants nil 3,000 nil 600 1,200 3,200 nil 3,000 100 nil 4,800 6,300 1,200 3,800 Current liabilities Bank overdraft Trade payables Government grants Finance lease obligations (note (iii)) Taxation nil 3,100 400 nil 600 nil 500 200 4,100 5,700 (c) Explain the limitations of ratio analysis and any further information that may be useful to the directors of Amekom Plc when making an acquisition decision. 4 marks Total equity and liabilities 14,400 14,800 Notes (1) Both companies operate from similar premises. (ii) Additional details of the two companies' plant are: Bordiem Plc Apim Plc GH'000 GH'000 Owned plant - cost 8,000 10,000 Leased plant - original fair value nil 7,500 There were no disposals of plant during the year by either company. (iii) The interest rate implicit within ABC Pic's finance leases is 7-5% per annum. For the purpose of calculating ROCE and gearing, all finance lease obligations are treated as long-term interest-bearing borrowings: (iv) The following ratios have been calculated for Bordiem Plc and can be taken to be correct: Return on year end capital employed (ROCE) 14.8% (capital employed taken as shareholders' funds plus long-term interest bearing borrowings - see note (iii) above) Pre-tax return on equity (ROE) 19.1% Net asset (total assets less current liabilities) turnover 1-2 times Gross profit margin 12.5% Operating profit margin 10-5% Current ratio 1-2:1 Closing inventory holding period 70 days Trade receivables' collection period 73 days Trade payables' payment period (using cost of sales) 108 days Gearing (see note (iii) above) 35-3% Interest cover 6 times Dividend cover 3-6 times You are required to: (a) Calculate for Apim Plc the ratios equivalent to all those given for Bordiem Plc above. 6 marks (b) Assess the relative performance and financial position of Bordiem Plc and Apim Plc for the year ended 30 September 2020 to inform the directors of Amekom Plc in their acquisition decision. 10 marks