Determine the value of each component

Reference no: EM133475116

Question: You have recently commenced as a financial analyst for a mid-tier accounting firm, Specialist Business Advisers Limited (SBA). With offices in Australia and New Zealand, the firm provides high quality, business specific support and advice.

Zester is a long-term client of SBA. Jasmin and Harvey are becoming close personal friends of SBA's lead partner, Jessica Johnson (FCA). In the past SBA has provided advice and support to Zester in relation to the upgrade of its processing facility in Adelaide and its acquisition of Calimond, Galangal and GaZing.

Jessica goes to extreme lengths to ensure that all staff working on a job have a deep understanding of the client and its needs.

Recently Jessica was asked to attend a closed board session (only directors of Zester were in attendance). At this meeting the board discussed the overall financial performance of the business.

Key issues raised included:

the pressure on gross margins, and its direct impact on profitability
the high and growing level of debt, both in interest-bearing liabilities and convertible notes
maintaining debt covenants
the low level of dividends being paid to shareholders
the high P/E ratio: over 15 times, based on the current share price
the high level of investment in working capital.

To address these concerns, the board of Zester are considering the sale of a component of the Zester business with a view to raising $5-10 million.

The two alternatives under consideration are:

Sale of the retail shop network
Sale of Calimond Limited

To determine the value of each component, the board is using an earnings multiple of between 4 and 5 times net profit after tax.

SBA, and more specifically Jessica, has been asked to prepare paper for the board and recommend alternative actions that Zester could take in relation to the potential business sales.

You and your group are scheduled to meet two weeks before the board meeting to discuss and document key items that Jessica needs to include in her report and presentation.

Reference no: EM133475116

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