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XYZ GROUP: FINANCIAL ANALYSIS
It is now the end of Year 2. XYZ Group has three divisions, each producing and selling a different group of products. Information about the financial performance of each division/product group is as follows.
| Division A | Year 1 | Year 2 | Year 3 (forecast) |
|---|---|---|---|
| Sales | GH₵000 | GH₵000 | GH₵000 |
| 8,000 | 8,323 | 8,741 | |
| Cost of sales | 4,400 | 4,520 | 4,610 |
| Gross profit | 3,600 | 3,803 | 4,131 |
| Transport costs | 400 | 415 | 430 |
| R&D expenditure | low | low | low |
| Market share | 11% | 10% | 8% |
| Sales volume index | 100 | 102 | 104 |
| Division B | Year 1 | Year 2 | Year 3 (forecast) |
|---|---|---|---|
| Sales | GH₵000 | GH₵000 | GH₵000 |
| 10,000 | 11,220 | 12,600 | |
| Cost of sales | 6,000 | 6,480 | 7,000 |
| Gross profit | 4,000 | 4,740 | 5,600 |
| Transport costs | 350 | 390 | 450 |
| R&D expenditure | high | high | high |
| Market share | 27% | 27% | 27% |
| Sales volume index | 100 | 110 | 121 |
| Division C | Year 1 | Year 2 | Year 3 (forecast) |
|---|---|---|---|
| Sales | GH₵000 | GH₵000 | GH₵000 |
| 6,000 | 5,600 | 5,400 | |
| Cost of sales | 3,900 | 4,080 | 4,210 |
| Gross profit | 2,100 | 1,520 | 1,190 |
| Transport costs | 360 | 476 | 540 |
| R&D expenditure | medium | medium | medium |
| Market share | 20% | 20% | 20% |
| Sales volume index | 100 | 107 | 114 |
Required:
Use this information to evaluate the performance of the three product groups. You should try to use an analytical model to support your financial analysis.
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Kumasi Lubricants Plc wishes to increase its production capacity by purchasing additional plant and equipment at a cost of GH¢3.8 million. The abridged statement of profit or loss for the year ended 30th November 20X6 is as follows:
| GH¢m | |
|---|---|
| Sales turnover | 140.6 |
| Profit before interest and taxation | 8.4 |
| Interest | 6.8 |
| Profit before tax | 1.6 |
| Tax | 0.4 |
| Profit after taxation | 1.2 |
Earnings per share: 15 cents
In order to finance the purchase of the new plant and equipment, the directors of the company have decided to make a rights issue equal to the cost of the equipment. The shares are currently quoted on the stock exchange at GH¢2.70 per share and the new shares will be offered to shareholders at GH¢1.90 per share.
Required:
(a) Calculate:
(i) the theoretical ex-rights price per share
(ii) the value of the rights on each existing share
(iii) Existing P/E ratio = GH¢2.70 / GH¢0.15 = 18.0
(b) What are the options available to a shareholder who receives a rights offer from a company?
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A company, Kofi Enterprises Plc, wishes to increase its production capacity by purchasing additional plant and equipment. Its statement of profit or loss for the year ended 30th November Year 3 is as follows:
| GH¢m | |
|---|---|
| Sales revenue | 224 |
| Profit before interest and taxation | 45.5 |
| Interest | 11.4 |
| Profit before tax | 34.1 |
| Tax | 7.7 |
| Profit after tax | 26.4 |
Earnings per share: GH¢0.30
To finance the new investment, Kofi Enterprises Plc will make a 1 for 4 rights issue. The shares are currently quoted on the Stock Exchange at GH¢5.50 per share and the new shares will be offered to shareholders at GH¢4.50 per share.
Ignore the transaction costs of the share issue.
Required:
(A) Calculate the theoretical ex-rights price per share.
(B) Calculate the value of the rights on each existing share.
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Apex Enterprises has a mixture of investment portfolios, Stock A and Stock B. The historical performance return on the stocks are as follows:
| Year | Stock A Return | Stock B Return |
|---|---|---|
| 20X5 | -10% | -3% |
| 20X6 | 18% | 21% |
| 20X7 | 39% | 44% |
| 20X8 | 14% | 4% |
| 20X9 | 33% | 28% |
Required:
(a) Calculate the average rate of return for each stock during the period of 20X5 to 20X9.
(b) Calculate the average return on the portfolio during the period if Apex Enterprises held 50% each of Stock A and Stock B.
(c) Calculate the return of the portfolio using standard deviation approach.
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Regal Enterprises Ltd. has a mixture of investment portfolios, Project 3 and Project 4. The historical performance return on the projects are as follows:
| Return | Probability | |
|---|---|---|
| Project 3 | 6.0 | 0.6 |
| 1.0 | 0.4 | |
| Project 4 | 8.0 | 0.5 |
| -1.0 | 0.5 |
Required:
(a) Calculate the expected return and standard deviation for Project 3 and Project 4. (6 marks)
(b) The divisional manager will invest in projects that are more risky if they offer a higher return. Advise which project the manager will invest in, considering the expected returns of Project 1 (3.6) and Project 2 (3.95).
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Ashanti Pharmaceuticals Ltd has an objective in its long-term business plan of achieving significant growth in its business in the period Year 1 to Year 5. It is now the end of Year 2.
Its results for the years to 31st December Year 1 and Year 2 are summarised below.
Statement of profit or loss for the year ended 31 December
| Year 2 (GH₵) | Year 1 (GH₵) | |
|---|---|---|
| Sales | 31,200,000 | 26,000,000 |
| Cost of sales | 18,720,000 | 15,600,000 |
| Gross profit | 12,480,000 | 10,400,000 |
| Operating costs | 6,780,000 | 5,200,000 |
| Interest charges | 500,000 | – |
| Taxation | 3,000,000 | 3,000,000 |
| Net profit | 2,200,000 | 2,200,000 |
Statement of financial position as at 31st December
| Year 2 (GH₵) | Year 1 (GH₵) | |
|---|---|---|
| Non-current assets | 27,300,000 | 26,000,000 |
| Net current assets | 15,600,000 | 7,800,000 |
| Total assets | 42,900,000 | 33,800,000 |
| Borrowings | 9,000,000 | – |
| Net assets | 33,900,000 | 33,800,000 |
| Share capital and reserves | 19,500,000 | 19,500,000 |
| Retained earnings | 14,400,000 | 14,300,000 |
| Total equity | 33,900,000 | 33,800,000 |
Sales are seasonal, and are much higher in the first six months of the year than in the second six months. The half-yearly sales figures in the past two years have been as follows:
Sales
| Year 2 (GH₵) | Year 1 (GH₵) | |
|---|---|---|
| First six months | 21,645,000 | 16,900,000 |
| Second six months | 9,555,000 | 9,100,000 |
| Total | 31,200,000 | 26,000,000 |
The company employs part-time workers during the first six months of each year. Part-time workers operate for a full working week during the weeks that they are employed. Employee numbers have been as follows:
Employee numbers
| Year 2 | Year 1 | |
|---|---|---|
| Full-time | 318 | 260 |
| Part-time (first six months) | 494 | 310 |
The company introduced four new products to the market in Year 1 and another five new products in Year 2.
Required:
Explain with reasons whether the company appears to be on course for achievement and production.
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Kumasi Construction Materials Ltd is organised into two trading divisions. Division A makes materials that are used to manufacture special bricks. It transfers some of these materials to Division B and sells some of the materials externally to other brick manufacturers. Division B makes special bricks from the materials and sells them to traders in building materials.
The production capacity of Division A is 2,000 tonnes per month. At present, sales are limited to 1,000 tonnes to external customers and 600 tonnes to Division B.
The transfer price was agreed at GH₵200 per tonne in line with the external sales trade price at 1st July which was the beginning of the budget year. From 1st December, however, strong competition in the market has reduced the market price for the materials to GH₵180 per tonne.
The manager of Division B is now saying that the transfer price for the materials from Division A should be the same as for external customers. The manager of Division A rejects this argument on the basis that the original budget established the transfer price for the entire financial year.
From each tonne of materials, Division B produces 1,000 bricks, which it sells at GH₵0.40 per brick. It would sell a further 400,000 bricks if the price were reduced to GH₵0.32 per brick.
Other data relevant are given below:
| Division A | Division B |
|---|---|
| GH₵ | GH₵ |
| Variable cost per tonne | 70 |
| Fixed cost per month | 100,000 |
The variable costs of Division B exclude the transfer price of materials from Division A.
Required:
(a) Prepare estimated profit statements for the month of December for each division and for Kumasi Construction Materials Ltd as a whole, based on transfer prices of GH₵200 per tonne and of GH₵180 per tonne, when producing at
(i) 80% capacity
(ii) 100% capacity, on the assumption that Division B reduces the selling price to GH₵0.32.
(b) Comment on the effect that might result from a change in the transfer price from GH₵200 to GH₵180.
(c) Suggest an alternative transfer price that would provide an incentive for Division B to reduce the selling price and increase sales by 400,000 bricks a month.
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An investor is planning to invest in two securities, Security X and Security Y. The expected return from each security will depend on the state of the economy, as follows:
| State of the economy | Probability | Return from Security X | Return from Security Y |
|---|---|---|---|
| Strong | 0.25 | 15% | 20% |
| Fair | 0.60 | 10% | 8% |
| Weak | 0.15 | 2% | (6%) |
Required:
(a) Calculate the mean and standard deviation of the expected return from Security X.
(b) Calculate the mean and standard deviation of the expected return from Security Y.
(c) Calculate the covariance of the returns from Security X and Security Y. The formula for a covariance is:
Cov_x,y = Σ p (x – x̄)(y – ȳ)
(d) Calculate the correlation coefficient for returns from Security X and Security Y, for a portfolio consisting of 50% of the funds invested in Security X and 50% of the funds invested in Security Y. The formula for correlation coefficient is:
ρ_XY = Covariance_XY / (σ_X σ_Y)
where:
σ_x = the standard deviation of returns from Security X
σ_y = the standard deviation of returns from Security Y
Cov_x,y = Covariance of X and Y
Comment on the correlation coefficient.
(e) Calculate expected return, the variance and standard deviation of a portfolio consisting of 50% of the funds invested in Security X and 50% of the funds invested in Security Y. The formula for correlation coefficient is: a²(Variance X)² + (1-a)²(Variance Y)² + 2a(1-a)Cov_x,y
where:
a = the proportion of the portfolio invested in Security X
(1-a) = the proportion of the portfolio invested in Security Y
Variance X = the variance of the returns from Security X
Variance Y = the variance of the returns from Security Y
(f) Calculate expected return, the variance and standard deviation of a portfolio consisting of 80% of the funds invested in Security X and 20% of the funds invested in Security Y.
Answer:
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Tema Electrical Plc is considering whether to purchase a machine for the manufacture of a new product, Product X. It has been estimated that Product X would have a life of four years and at a selling price of GH¢8 per unit, annual sales demand would be 400,000 units in Year 1, 600,000 units in Year 2 and 800,000 in each of Years 3 and 4.
Variable production and selling costs would be GH¢6 per unit. Incremental annual fixed cost expenditures (all cash cost items) would be GH¢500,000 in Year 1, rising by GH¢20,000 each year.
The machine, which has an annual output capacity of 700,000 units of Product X, would cost GH¢1,200,000 and would have a resale value of GH¢200,000 at the end of Year 4. Capital allowances would be available on a 25% annual reducing balance basis, with a balancing charge or allowance in the year of disposal. Tax at 25% is payable one year in arrears of the profits to which it relates.
Tema Electrical Plc is financed 70% by equity capital and 30% by debt capital. The equity has a cost of 10% and the debt has a cost of 8.9% (before tax).
Required
Calculate the net present value of the proposed project and recommend whether the investment in the machine should be undertaken.
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