Case Stimulus
Alpha PLC is an entity which has grown in recent years by acquiring established businesses. Alpha PLC is contemplating acquiring Betta Limited and Gamma Limited.
Alpha PLC, Betta Limited and Gamma Limited operate in the same industry. Alpha PLC believes that their company shareholders will be receptive to the takeover. The Management of Alpha PLC has indicated a total (100%) acquisition price of N12 million for each of the companies.
The financial statements for Betta Limited and Gamma Limited are as shown below:
Statement of profit or loss for the year ended September 30, 2020
Betta Ltd Gamma Ltd
N’000 N’000
Revenue 25,000 40,000
Cost of sales (19,000) (32,800)
Gross profit 6,000 7,200
Distribution costs (800) (1,400)
Administrative expenses (450) (900)
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 September 30, 2020
Betta Ltd Gamma Ltd
N’000 N’000
Non-current assets
Property, plant and equipment:
Property - 3,000
Owned plant and equipment 4,800 2,000
Leased plant and equipment - 5,300
4,800 10,300
Current assets:
Cash at bank and in hand 1,600 200
Trade receivables 1,600 5,100
Inventories 1,600 3,400
4,800 8,700
Total assets 9,600 19,000
Equity and liabilities
Ordinary shares of N1.00 each 1,000 2,000
Revaluation surplus on property - 900
Retained earnings 1,600 2,700
Total equity 2,600 5,600
Non-current liabilities
Finance lease obligation - 4,200
5% loan notes (December 31, 2026) 5,000 -
10% loan notes (December 31, 2026) - 5,000
5,000 9,200
Current liabilities:
Trade payables 1,250 2,100
Finance lease obligation - 1,000
Tax payable 750 1,100
Total current liabilities 2,000 4,200
Total equity and liabilities 9,600 19,000
Additional information:
(i) The carrying amount of plant: Betta Gamma
N’000 N’000
Owned plant – cost 8,000 10,000
Less government grant (2,000) -
6,000 10,000
Accumulated depreciation (1,200) (8,000)
Carrying amount 4,800 2,000
Leased plant – original fair value nil 8,000
(i) The following ratios have been calculated:
Betta Gamma
Gross profit margin 24.0% 18.0%
Profit margin (before interest and tax) 19.0% 12.3%
*Return on capital employed (ROCE)* 62.5% 31.0%
*Note: Finance lease obligations are treated as debt
Current ratio 2.4:1 2.1:1
Acid test ratio 1.6:1 1.26:1
Net assets turnover 3.3 times 2.5 times
*Note: Taken as same figure as capitals employed
Closing inventories 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%