Statements of comprehensive income for the year ended Abacus Benet Shs ‘million’ Shs ‘million’ Sales 20,000 30,000 Cost of sales (7, XXXXXXXXXX,000) Gross profit 13,000 15,000 Other expenses (2,000)...



Statements of comprehensive income for the year ended



Abacus Benet



Shs ‘million’ Shs ‘million’


Sales 20,000 30,000


Cost of sales (7,000) (15,000)


Gross profit 13,000 15,000


Other expenses (2,000) (5,000)


Administrative expenses (1,000) (2,000)


Profit before interest and tax 10,000 8,000


Interest (1,000) (1,200)


Profit after interest before tax 9,000 6,800


Tax (at 30%) (2,700) (2,040)



Profit after tax 6,300 4,760



Statement of financial position as at 31 December:


Abacus Benet


Shs ‘million’ Shs ‘million’


Non-current assets:


Property plant & equipment 13,400 17,000


Current assets: Receivables 9,500 12,200


Inventory 8,200 6,000


Cash 6,000 2,360



Total assets 37,100 37,560


Equity & liabilities:


Ordinary shares 9,200 10,200


Reserves 8,300 6,160


Total equity 17,500 16,360


Non-current liabilities:


Long-term debt 5,000 6,000


Current liabilities:


Other accounts payable 8,000 6,200


Accruals 6,600 9,000


14,600 15,200



Total equity & liabilities 37,100 37,560


The following selected ratios are also provided:


Ratio Industry average


Current ratio 2:1


Quick/ acid test ratio 1:1


Net profit margin 25%


Debt to equity ratio 40%


Interest coverage ratio 4 times


Receivables days 60 days


You may assume 360 days in a year.


Mr. Bemba is also aware that he can use preference shares as one of the sources of finance. One potential investor has offered to buy 10% redeemable preference shares of Shs 20,000 each at Shs 25,000 and these shares will be redeemed after 10 years at par. Mr. Bemba has been has indicated that he is ready to embark on any project that comes his way provided it fits within his capital investment budget.


Required:


Mr. Bemba has shared with you the information in his possession and is seeking guidance on the following issues:


(a) Using the industry ratios as a benchmark, advise on which company to partner with. 17 marks


(b) Ratio analysis is a widely used technique to evaluate the financial position and performance of a business. However, there are certain problems associated with using ratios.


Required:


Briefly explain the key aspects of financial position and performance that may be evaluated by ratios, and list some of the problems referred to in the above statement.
May 26, 2022
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