Question: Alpha plc and Beta Ltd are competitors in the same industry, and sector.
You are provided with the most recent summarized financial accounts for the two companies as follows: -
Balance Sheets: -
Alpha Beta
£000's £000's £000's £000's
Fixed Assets
Freehold property at cost 105,000 188,000
Other assets at cost 63,000 84,000
Depreciation 21,000 66,000
Net book value 42,000 18,000
147,000 206,000
Current Assets
Stocks 70,875 79,800
Debtors 44,075 42,420
114,950 122,220
Current Liabilities
Creditors 32,530 81,720
Overdraft 1,420 42,000
Taxation 20,000 3,500
53,950 127,220
Net Current Assets/(Liabilities) 61,000 (5,000)
208,000 201,000
Non-Current Liabilities
8% Debentures 20X6 52,500 __-___
155,500 201,000
====== ======
Financed by:
Ordinary shares 84,000 128,000
Retained profits 71,500 73,000
155,500 201,000
Profit and loss accounts: -
Alpha Beta
£000's £000's £000's £000's
Turnover 420,000 315,000
Cost of sales 336,000 236,250
Gross profit 84,000 78,750
Less expenses:
Administration 14,300 12,950
Selling and distribution 13,500 12,800
Directors' emoluments 11,000 14,000
Depreciation 9,000 7,500
Overdraft interest 500 3,000
Debenture interest 4,200 -___
52,500 50,250
Profit before tax 31,500 28,500
Corporation tax 20,000 3,500
Profit after tax 11,500 25,000
Retained profits 60,000 48,000
Retained profits at year end 71,500 73,000
===== =====
Requirement:
Using the above information you are required to write a report to the board of directors of a company considering making a substantial investment in one of the two companies.
Your report should cover the following areas: -
(1) the liquidity of the companies;
(2) the profitability of the companies;
(3) their effectiveness in the utilization of assets;
(4) the suitability for potential investment in one of the companies.
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