QUESTION TWOYou are the accountant of Acquirer. Your company has the strategy of growth byacquisition and your directors have identified an entity, Target, which they wish toinvestigate with a view to launching a takeover bid. Your directors consider that thedirectors of Target will contest any bid and will not be very co$-$operative in providingbackground information on the entity. Therefore, relevant financial information is likelyto be restricted to the publicly available financial statements.Your directors have asked you to compute key financial ratios from the latest financialstatements of Target $($for the year ended $30$ November $2002)$ and compare the ratioswith those for other entities in a similar sector. Accordingly, you have selected tenbroadly similar entities and have presented the directors with the followingcalculations:RatioGross profitmarginOperatingprofit marginReturn on totalcapitalInterest coverGearingDividend coverInventoryturnoverReceivablesdaysBasis of calculationRequired:Gross profitRevenueProfit from operationsRevenueProfit from operationsTotal capitalProfit from operationsFinance costDebt capitalTotal capitalProfit after taxDividendCost of salesClosing inventoryTrade receivables$1$day's sales revenueAssume that it is now November $20$X$3.$Ratio forTarget$42\%29\%73\%1\mathrm{.}8$times$52\%5\mathrm{.}2$times$4\mathrm{.}4$timesSpread of ratios forcomparative entitiesHighest Average Lowest$44\%37\%92\mathrm{.}5\%56\%5$ times$38\%30\%3\mathrm{.}2$ times $2\mathrm{.}5$ times$51$ days $81$ davsPage $3$ of $1969\%40\%4$ times$4\mathrm{.}5$ times $4$ times$33\%26\%52\%1\mathrm{.}6$times$28\%3$ times$3\mathrm{.}2$times$62$ days $49$ days$($a$)$Using the ratios provided, write a report that compares the financialperformance and position of Target to the other entities in the survey. Where anissue arises that reflects particularly favourably or unfavourably on Target, youshould assess its relevance to a potential acquirer.$(15$ marks$)($b$)$ldentify any reservations you have regarding the extent to which the ratiosprovided can contribute to an acquisition decision by the directors of Acquirer.You should highlight the extent to which the financial statements themselvesmight help you to overcome the reservations you have identified. $(10$ marks$)[$Total: $25$ marks$]$