Reference no: EM13256840

Hand-in Assignment Question

XYZ Ltd is a group of doctors, dentists, professional sports players and celebrities with excess funds who wish to find small companies with great innovative ideas and invest in them. Several of the small companies present their idea to XYZ under a televised show broadcasted on national TV.

The following information has been derived from the past three years' financial statements of ABC Ltd, one of the small companies looking for investment from XYZ.

Balance sheets, December 31

	2012	2011	2010
Current assets
Cash	50,000	45,000	94,000
Account receivable, net	130,000	120,000	110,000
Merchandise inventories	250,000	230,000	195,000
Other current assets	45,000	53,000	42,000
Total current assets	475,000	448,000	441,000
Property plant and equipment, net	196,000	191,000	175,000
Total assets	671,000	639,000	616,000
Current liabilities
Accounts payable	175,000	195,000	185,000
Accrued liabilities	1,000	6,500	21,000
Total current liabilities	176,000	201,500	206,000
Long-term liabilities	230,000	250,000	295,000
Total liabilities	406,000	451,500	501,000
Shareholders' equity
Common shares	110,000	95,000	65,000
Preferred shares, note 5	25,000	25,000	25,000
Retained earnings	130,000	67,500	25,000
Total shareholders' equity	265,000	187,500	115,000
Total liabilities and shareholders' equity	671,000	639,000	616,000

Income statements

	2012	2011
Net sales	£723,700	£694,000
Cost of goods sold	347,350	344,500
Gross margin	376,350	349,500
Operating expenses	183,500	179,750
Income from operations	192,850	169,750
Interest expense	37,525	39,450
Income before income tax	155,325	130,300
Income tax expense	38,831	32,575
Net income	£116,494	£97,725

Additional information:

1. The common shares are traded on the stock exchange. At the end of 2012, the value of the share was £15.00, and at the end of 2011, the value per share was £14.00.

2. The number of shares outstanding on the market is as follows:

1. 2012: 25,000

2. 2011: 15,000

3. 2010: 10,000

3. All sales are made on credit.

4. The company's income tax rate is 25%.

5. The preferred shares are cumulative; no par value, £2.50; 10,000 Shares authorised; 2,000 shares issued and outstanding.

Complete the following:

You, the consultant, have been hired by XYZ to assist in the analysis of the financial statements and provide a recommendation as to whether XYZ should invest or not invest in this company. You should justify your recommendation based on the calculation of the following financial ratios:

• Current ratio (Liquidity)
• Operating profit margin (Profitability)
• Return on Ordinary Shareholders' Funds (ROSF) (Profitability)
• Average settlement period for trade receivables (Efficiency)
• Earnings per share (Investme