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Question 2b
Xpand is a public company which has grown in recent years by acquiring established businesses.
The following financial statements for two potential target companies are shown below.
They operate in the same industry sector and Xpand believes their shareholders would be receptive to a takeover.
An indicative price for 100% acquisition of the companies is $12 million each.
Statements of profit or loss for the year ended 30 September 2015
| Kandid | Kovert | |
|---|---|---|
| $’000 | $’000 | |
| Revenue | 25,000 | 40,000 |
| Cost of sales | (19,000) | (32,800) |
| Gross profit | 6,000 | 7,200 |
| Distribution and administrative expenses | (1,250) | (2,300) |
| Finance costs | (250) | (900) |
| Profit before tax | 4,500 | 4,000 |
| Income tax expense | (900) | (1,000) |
| Profit for the year | 3,600 | 3,000 |
Statements of financial position as at 30 September 2015
| Non-current assets | nil | 3,000 |
| Property | 4,800 | 2,000 |
| Owned plant | nil | 5,300 |
| Leased plant | 4,800 | 10,300 |
| Current assets | ||
| Inventory | 1,600 | 3,400 |
| Trade receivables | 1,600 | 5,100 |
| Bank | 1,100 | 200 |
| 4,800 | 8,700 | |
| Total assets | 9,600 | 19,000 |
| Equity and liabilities | ||
| Equity | ||
| Equity shares of $1 each | 1,000 | 2,000 |
| Property revaluation surplus | nil | 900 |
| Retained earnings | 1,600 | 2,700 |
| 2,600 | 5,600 | |
| Non-current liabilities | ||
| Finance lease obligation | nil | 4,200 |
| 5% loan notes (31 December 2016) | 5,000 | nil |
| 10% loan notes (31 December 2016) | nil | 5,000 |
| 5,000 | 9,200 | |
| Current liabilities | ||
| Trade payables | 1,250 | 2,100 |
| Finance lease obligation | nil | 1,000 |
| Taxation | 750 | 1,100 |
| 2,000 | 4,200 | |
| Total equity and liabilities | 9,600 | 19,000 |
Notes
| (i) | Carrying value of plant: |
|---|
| Kandid | Kovert | |
|---|---|---|
| $’000 | $’000 | |
| Owned plant – cost | 8,000 | 10,000 |
| Less government grant | (2,000) | |
| 6,000 | ||
| Accumulated depreciation | (1,200) | (8,000) |
| 4,800 | 2,000 | |
| Leased plant – original fair value | nil | 8,000 |
| (ii) | The following ratios have been calculated: |
|---|
| Kandid | Kovert | |
|---|---|---|
| Return on year-end capital employed (ROCE) | 62·5% | 31·0% |
| (finance lease obligations are treated as debt) | ||
| Net asset (taken as same figure as capital employed) turnover | 3·3 times | 2·5 times |
| Gross profit margin | 24·0% | 18·0% |
| Profit margin (before interest and tax) | 19·0% | 12·3% |
| Current ratio | 2·4:1 | 2·1:1 |
| Closing inventory holding period | 31 days | 38 days |
| Trade receivables’ collection period | 31 days | 47 days |
| Trade payables’ payment period (using cost of sales) | 24 days | 23 days |
| Gearing (debt/(debt + equity)) | 65·8% | 64·6% |
Required:
| (b) | Describe what further information may be useful to Xpand when making an acquisition decision. (4 marks) |
|---|