Reference no: EM133104938
Question - Hove Co is a large public company that would like to acquire (100% of) a suitable private company. It has obtained the following draft financial statements for two companies, Astral Co and Breakout Co. They operate in the same industry, which manufacture energy drinks.
Statements of Profit or Loss for the Year Ended 30 September 20X8
|
Astral Co
|
Breakout Co
|
|
£000
|
£000
|
|
Revenue
|
24,000
|
41,000
|
|
Cost of sales
|
(21,000)
|
(36,000)
|
|
Gross profit
|
3,000
|
5,000
|
|
Operating expenses
|
(480)
|
(1,000)
|
|
Finance costs:
|
|
|
|
-loan
|
(420)
|
(600)
|
|
-overdraft
|
Nil
|
(20)
|
|
-lease
|
Nil
|
(580)
|
|
Profit before tax
|
2,100
|
2,800
|
|
Income tax expense
|
(300)
|
(800)
|
|
Profit for the year
|
1,800
|
2,000
|
|
|
|
|
Note. Dividends were paid during the year
|
500
|
1,400
|
Statements of Financial Position as at 30 September 20X8
|
Astral Co
|
Breakout Co
|
|
£000
|
£000
|
|
Assets
|
|
|
|
Non-current assets
|
|
|
|
Freehold factory (Note 1)
|
8,800
|
Nil
|
|
Owned plant (Note 2)
|
10,000
|
4,400
|
|
Leased plant (Note 2)
|
Nil
|
10,600
|
|
18,800
|
15,000
|
|
Current assets
|
|
|
|
Inventory
|
4,000
|
7,200
|
|
Trade receivables
|
4,800
|
7,400
|
|
Bank
|
1,200
|
Nil
|
|
10,000
|
14,600
|
|
Total assets
|
28,800
|
29,600
|
|
Equity and liabilities
|
|
|
|
Equity shares of £1 each
|
4,000
|
4,000
|
|
Revaluation surplus
|
1,800
|
Nil
|
|
Retained earnings
|
5,200
|
1,600
|
|
7,000
|
1,600
|
|
11,000
|
5,600
|
|
Non-current liabilities
|
|
|
|
Lease liabilities (Note 3)
|
Nil
|
6,400
|
|
7% loan notes
|
6,000
|
Nil
|
|
10% loan notes
|
Nil
|
6,000
|
|
Deferred tax
|
1,200
|
200
|
|
Government grants
|
2,400
|
Nil
|
|
9,600
|
12,600
|
|
Current liabilities
|
|
|
|
Bank overdraft
|
Nil
|
2,400
|
|
Trade payables
|
6,200
|
7,600
|
|
Government grants
|
800
|
Nil
|
|
Lease liabilities (Note 3)
|
Nil
|
1,000
|
|
Taxation
|
1,200
|
400
|
|
8,200
|
11,400
|
|
Total equity and liabilities
|
28,800
|
29,600
|
Notes -
1. Both companies operate from similar premises.
2. Additional details of the two companies' plant are:
|
Astral Co
|
Breakout Co
|
|
£000
|
£000
|
|
Owned plant-cost
|
16,000
|
20,000
|
|
Right of use asset-Leased plant-original fair value
|
Nil
|
15,000
|
There were no disposals of plant during the year by either company.
1. The interest rate implicit within Breakout Co's leases is 7.5% per annum. For the purpose of calculating ROCE and gearing, all lease liabilities are treated as long-term interest-bearing borrowings.
2. The following ratios have been calculated for Astral Co and can be taken to be correct:
|
Return on year end capital employed (ROCE) (capital employed taken as shareholders' funds plus long-term interest-bearing borrowings, see Note 3 above)
|
14.8%
|
|
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 3 above)
|
35.3%
|
|
Interest cover (using EBIT)
|
6 times
|
|
Dividend cover
|
3.6 times
|
Required -
(a) Calculate for Breakout Co the ratios equivalent to all those given for Astral Co above.
(b) Assess the relative performance and financial position of Astral Co and Breakout Co for the year ended 30 September 20X8 to inform the directors of Hove Co in their acquisition decision.
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