Business Finance

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i have answer for account exam.

i need to rephrase. just the answer only, you can check the attach (from page 3)

rephrase it to simply English.


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School of Law & Finance SHRO36-6 ACCOUNTING FOR LEADERS MAIN CLASS TEST WITH ANSWERS Date : Start Time TBC : TBC Time Allowed: 60 minutes Unit Coordinator: Teddy Foster Total: 25 marks. INSTRUCTIONS TO CANDIDATES • The entire content of this test is COMPULSORY; • This is closed book test; • No written materials (including dictionaries, e-dictionaries and e-readers); • Only simple electronic calculators may be used (you may NOT use any electronic devices, including mobile phones, capable of holding text). PLEASE DO NOT OPEN THIS PAPER UNTIL INSTRUCTED TO DO SO BY THE SENIOR INVIGILATOR AND DO NOT REMOVE THIS PAPER FROM THE EXAMINATION HALL Page 1 of 6 The Managing Director of Gemini Investments Plc (GIP) is considering the financial information of ACME Trading Ltd (ACME), for the year ending 30 May 2017. They are considering acquiring the company shares and trying to decide whether to bid for control or to take a smaller stake in the business. Turnover (£ millions) Gross Profit margin Net profit margin Return on Shareholders' Funds Asset Turnover (times) Current ratio Acid test ratio Stock turnover (days) Trade receivables settlement period (days) Trade payables settlement period (days) Gearing Interest cover (times) Dividend cover (times) Price Earnings Ratio Earnings per share (£) Dividend Yield (Dividend/Share Price) 2017 450 43% 26.00% 21.60% 5 2.2 1.1 45 30 35 52% 5.5 2.1 11 0.52 6.10% 2016 375 36% 22.00% 20.00% 4 2 0.85 60 45 30 55% 4.7 1.45 9 0.4 4.90% The following additional information is relevant: a) Purchase and sales are made evenly throughout the year b) All purchases and sales are made on credit terms c) Inflationary effects are to be ignored d) The company makes and sells only one product e) There was investment in Plant & Equipment during the previous year totaling £75m. Required As a Management Consultant, you are required to produce a report for the Board of Directors of Gemini Investments Plc, which covers, inter alia, the following regarding ACME Trading Ltd: 1. Analysis and interpretation of the available information provided; 2. An assessment of the completeness of the information provided and its implications for your analysis and advice; 3. Areas that, in your assessment, require further investigation; 4. Limitations of your analysis and interpretation; 5. A recommendation, based upon the information provided, as to whether Gemini Investments Plc should purchase an interest in ACME Trading Ltd, take a controlling stake, or not invest at all. (25 marks) Page 2 of 6 SHR036-6 AFL Main Class Test marking scheme. Flexible marking – maximum 25 marks. REPORT To: Board of Directors. Gemini Investments Plc From: The Management Consultant Date: 2017 Subject: Analysis of ACME Trading Ltd in respect of impending investment opportunity. Introduction This report has been drawn up to comment on the financial position of ACME Trading Ltd in the light of a possible purchase of an interest in the company. Ratio analysis alone does not constitute a full investigation into a company’s affairs, so certain areas are highlighted for further investigation. However, in line with the requirements of the consulting brief, the following analysis is provided. Profitability The turnover has risen over the period to £450 million, an increase of 20%. The gross profit margin has increased in 2017 to 43% - a rise of 19%. The rise is lower than the rise in turnover which could be as a result of increased raw material costs and/or labour wages. The net profit margin has also risen by 18% to 26% in line with the gross profit margin. With the company’s moderate gearing ratio and improving working capital cycle (see below), ACME Trading Ltd is set for growth and appears to have the means to achieve these objectives, particularly with the added investment in fixed assets of £75m. Page 3 of 6 Activity Ratios The overall asset turnover ratio has improved (up 25%) despite the increased fixed assets investment in the prior year. by 25% over the period. This investment appears to have provided improved efficiencies as noted above. Accounts payable has increased by 5 days, suggesting that the company has agreed better settlement arrangements with suppliers, but this cannot be confirmed without further information. Candidates should suggest ways of improving the situation. Liquidity Ratios The trend in the current ratio and quick ratio is also now favourable suggesting that the trading strategy is effective. This would require further information to be certain of these facts. Gearing The balance sheet gearing position has improved by 5%, suggesting that the positive working capital cycle is making cash flow available to settle debts. The trading position has also ensured that interest cover has strengthened. Investors Ratios Dividend cover has improved substantially, suggesting that there may be an opportunity for increased dividends in the future. Yet again, without knowledge of the planned growth strategy and the need for organic cash, this cannot be assumed. This is a very welcome situation for shareholders. The dividend yield, EPS, and dividend cover have all risen in line with the other indicators. The fact that the P/E ratio has increased substantially. Market news may be influencing the share price. Conclusion ACME Trading Ltd appears to be enjoying the growth and returns from their investment strategy and market gains. The reduction in borrowings (gearing ratio) combined with liquidity improvement places the company in a stronger position and poised for further growth. The rise in dividend cover, along with the growth in EPS is in line with the perceived market performance. However, the rise in P/E ratio suggests an increase in demand for ACME Trading Ltd shares. This indicates that there is possibly interest in the market for the control of the company or expectation of a take-over. Page 4 of 6 Recommendation. The likelihood that competitors of Gemini Investments Plc are showing an interest in ACME Trading Ltd and, if GIP does want to acquire the company, the directors would be advised to investigate the current share price movements to determine who is acquiring shares. With ACME experiencing growth and efficiency gains, the company is an appealing take-over opportunity but there may be other conditions that may be influencing the company’s ability to grow. Acquiring the company appears appealing but further information is required before a final decision can be made. In particular, what is driving the improvements; are they sustainable; and will they be compatible with the investment strategy of GIP? Candidates should suggest what else is needed (quantitative and qualitative). Limitations Candidates may refer to the limitations of ratio analysis and possibly bring in other issues such as marketing etc. • Retrospective perspective of ratios – past performance – out of date • Accounting policies – it would be necessary to know if policies had changed • Inflation and currency transactions – if historic cost is used (and it should be) then there could be problems of interpretation if inflation exists or if foreign transactions are significant (although the question does not suggest that this is so) • Standards – we should not rely on norms – for example 2:1 is often quoted as an acceptable current ratio, but in fact varies from sector to sector. Other factors The usual areas for speculation or indicators will be viewed favourably provided that the arguments are reasonably supported by the ratios. These include: Marketing Management stability/ management succession Markets/products/ competition Process/ R&D /operations Location Page 5 of 6 Working W 1 Turnover (£ millions) Gross Profit margin Net profit margin Return on Shareholders' Funds Asset Turnover (times) Current ratio Acid test ratio Stock turnover (days) Trade receivables settlement period (days) Trade payables settlement period (days) Gearing Interest cover (times) Dividend cover (times) Price Earnings Ratio Earnings per share (£) Dividend Yield (Dividend/Share Price) 2017 450 43% 26.00% 21.60% 5 2.2 1.1 45 30 35 52% 5.5 2.1 11 0.52 6.10% 2016 375 36% 22.00% 20.00% 4 2 0.85 60 45 30 55% 4.7 1.45 9 0.4 4.90% Change % 20% 19% 18% 8% 25% 10% 29% -25% -33% 17% -5% 17% 45% 22% 30% 24% Page 6 of 6 ...
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harris570 (1752)
UC Berkeley

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