QUESTION 4 [25 MARKS]

Superior Ltd is a company which has grown in recent years by acquiring other companies. Superior has targeted two firms, Boss Ltd and Brealey Ltd, operating in the same industry sector for acquisition. The acquisition (100%) cost for each company is estimated to be $ 24 million. The financial statements of the two target companies for the year ended 31 December 2019 are shown below:

Statements of profit or loss for the year ended 31 December 2019

	Boss	Brealey
	$ 000	$ 000
Revenue	50000	80000
Cost of sales	(38000)	(65600)
Gross profit	12000	14400
Distribution and administrative expenses	(2500)	(4600)
Finance costs	(500)	(1800)
Profit before tax	9000	8000
Income tax expense	(1800)	(2000)
Profit for the period	7200	6000
Statements of financial position as at 31 December 2019
	Boss	Brealey
	$000	$000
Non-current assets
Property, plant and equipment	9600	20600
Current assets
Inventory	3200	6800
Trade Receivables	4200	10200
Bank	2200	400
Total current assets	9600	17400
Total assets	19200	38000
Equity and liabilities
Capital and Reserves
Equity shares of $1	2,000	4000
Property revaluation surplus	-	1800
Retained earnings	3200	5400
Total capital and reserves	5200	11200
Non-current liabilities
Finance lease obligation	-	8400
6% loan notes (Note (ii))	10000	-
11% loan notes (Note (ii))	-	10000
Total non-current liabilities	10000	18400
Current liabilities
Finance lease obligation	-	2000
Trade payables	2500	4200
Tax payable	1500	2200
Total current liabilities	4000	8400
Total equity and liabilities	19200	38000

NOTES

1. Carrying value of plant

	Boss	Brealey
	$ 000	$ 000
Owned Plant - Cost	16,000	20,000
Accumulated depreciation	(6,400)	(16,000)
	9600	4000
Leased plant	-	16,600

2. Loan period: 01 January 2015 to 31 December 2021.

3. Ratios of Brealey for year ended 31 December 2019 are as follows:

	Brealey
(i) Return on year end capital employed (Finance lease obligations (current and non-current liabilities) are treated as debt)	31%
(ii) Net asset turnover	2.53 times
(iii) Gross profit margin	18.0%
(iv) Net profit margin before interest and tax	12.3%
(v) Current ratio	2.1 times
(vi) Closing inventory holding period	38 days
(vii) Trade receivables' period	47 days
(viii) Trade payables' period	23 days
(ix) Gearing	64.6%

REQUIRED

(a) Calculate the equivalent ratios for Boss Ltd for the year ended 31 December 2019. [15 Marks]

(b) Using the information provided and the ratios calculated in part (a), assess the relative performance and financial position of Boss Ltd and Brealey Ltd for the year ended 31 December 2019 in order to assist the directors of Superior Ltd to make an acquisition decision. [10 Marks]