- 20 Marks
Question
Set out below are the draft accounts of Wole-Adura Plc and subsidiaries and of Maseru Associates. Wole-Adura acquired 40% of the equity capital of Maseru Associates three years ago when the latter’s retained earnings stood at N140m.
Abridged statement of financial position
| Wole-Adura Plc & Subsidiaries | Maseru Associates |
|---|---|
| Property, plant, and equipment | 990 Nm |
| Investment in Maseru Associates at cost | 290 Nm |
| Loan to Maseru Associates | 70 Nm |
| Current assets | 450 Nm |
| Loan from Wole-Adura Plc. | – |
| Total Assets | 1800 Nm |
FINANCED BY:
| Ordinary shares of 50k each | 1,125 Nm | 350 Nm | | Retained earnings | 675 Nm | 350 Nm | | Total Equity | 1800 Nm | 700 Nm |
Abridged statements of profit or loss
| Wole-Adura Plc & Subsidiaries | Maseru Associates |
|---|---|
| Profit before tax | 427.50 Nm |
| Tax expense | (157.50 Nm) |
| Profit after tax | 270.00 Nm |
Additional information:
(i) Wole-Adura proposed a dividend of N225m.
(ii) Total market capitalisation is N5,625m.
Required:
(a) Calculate each of these ratios for Wole-Adura Plc. and subsidiaries:
- Earnings per share
- Dividend cover
- Earnings yield
- Dividend yield
(4 Marks)
(b)
- Using the equity method, compute the earnings of the group incorporating the associates. (4 Marks)
- Compute the ratios in (a) above for the group. (4 Marks)
(c) Comment on the ratios calculated in (a) and (b) above by pairwise comparison. (3 Marks)
(d) Extracts from the financial statements of Ikoku Plc. recently published are as follows:
Statement of profit or loss for the year ended December 31, 2017
| 2017 | 2016 |
|---|---|
| Revenue | 360 Nm |
| Cost of sales | (150 Nm) |
| Gross profit | 210 Nm |
| Operating expenses | (50 Nm) |
| Operating profit | 160 Nm |
| Interest expense | (10 Nm) |
| Tax expense | (60 Nm) |
| Profit for the year | 90 Nm |
Statement of financial position as at December 31, 2017
| 2017 | 2016 |
|---|---|
| Non-current assets | |
| Property, plant & equipment | 80 Nm |
| Current assets | |
| Inventory | 200 Nm |
| Trade receivables | 70 Nm |
| Bank | (50 Nm) |
| Total assets | 300 Nm |
Equity & liabilities
| Ordinary shares of N1 each | 60 Nm | 40 Nm | | Current liabilities | | | Trade payables | 190 Nm | 60 Nm | | Current tax | 50 Nm | 15 Nm | | Total liabilities and equity | 300 Nm | 115 Nm |
Required:
Discuss the liquidity challenges of Ikoku Plc. during the year ended December 31, 2017, from the extracts of the published financial statements. (5 Marks)
(Total 20 Marks)
Answer
(c) Commentary on Ratio Comparison
- Earnings Per Share: Increased by 3.11 kobo in the group (15.1 kobo), higher than Wole-Adura Plc and subsidiaries’ 12 kobo.
- Dividend Cover: Increased by 0.31 times in the group (1.51 times) over Wole-Adura Plc.
- Earnings Yield: Improved by 1.244% in the group (6.044%) compared to the original 4.8%.
- Dividend Yield: Remains constant at 4%.
(d) Liquidity Challenges of Ikoku Plc.
- Current Ratio: Declined from 1.27 (2016) to 0.92 (2017), indicating reduced ability to cover short-term liabilities.
- Quick Ratio: Sharply reduced, implying excessive inventory and higher payables due to increased trade payables and inventory from N60m to N190m and N40m to N200m, respectively.
- Bank Overdraft Impact: Shifted from a positive bank balance (N30m in 2016) to an overdraft of N50m in 2017.
- Working Capital: Decreased from N20m in 2016 to -N20m in 2017 due to liquidity strain.
- Topic: Associates and joint ventures
- Series: MAY 2018
- Uploader: Dotse