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Question 31b

Funject Co has identified Aspect Co as a possible acquisition within the same industry.

Aspect Co is currently owned by the Gamilton Group and the following are extracts from the financial statements of Aspect Co:

Extract from the statement of profit or loss for the year ended 31 December 20X4

$’000
Revenue 54,200
Cost of sales 21,500
Gross profit 32,700
Operating expenses 11,700
Operating profit
21,000

Statement of financial position as at 31 December 20X4

$’000 $’000
Assets
Non-current assets 24,400
Current assets
Inventory 4,900
Receivables 5,700
Cash at bank 2,300
12,900
Total assets 37,300
Equity and liabilities
Equity
Equity shares 1,000
Retained earnings 8,000
9,000
Liabilities
Non-current liabilities
Loan 16,700
Current liabilities
Trade payables 5,400
Current tax payable 6,200
11,600
Total equity and liabilities 37,300

Additional information:

(i)

On 1 April 20X4, Aspect Co decided to focus on its core business and so disposed of a non-core division. The disposal generated a loss of $1·5m which is included within operating expenses. The following extracts show the results of the non-core division for the period prior to disposal which were included in Aspect Co’s results for 20X4:

$’000
Revenue 2,100
Cost of sales (1,200)
Gross profit 900
Operating expenses (700)
Operating profit
200
(ii)

At present Aspect Co pays a management charge of 1% of revenue to the Gamilton Group which is included in operating expenses. Funject Co imposes a management charge of 10% of gross profit on all of its subsidiaries.

(iii)

Aspect Co’s administration offices are currently located within a building owned by the Gamilton Group. If Aspect Co were acquired, the company would need to seek alternative premises. Aspect Co paid rent of $46,000 in 20X4. Commercial rents for equivalent office space would cost $120,000.

(iv)

The following is a list of comparable industry average key performance indicators (KPIs) for 20X4:

KPI
Gross profit margin 45%
Operating profit margin 28%
Receivables collection period 41 days
Current ratio 1·6:1
Acid test (quick) ratio 1·4:1
Gearing (debt/ekvity) 240%

Required:

(b)

Calculate the 20X4 ratios for Aspect Co equivalent to those shown in note (iv) based on the restated financial
information calculated in part (a).

Note: You should assume that any increase or decrease in profit as a result of your adjustments in part (a) will
also increase or decrease cash. 
(5 marks)