Question Tag: Financial Analysis

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  • 14 Marks

CR – Nov 2024 – L3 – Q5b – Financial Performance & Digital Technology Integration

Evaluating the financial performance of Nsawkaw PLC and addressing challenges of digital technology integration in accounting.

(a) Compute the following ratios for the years ended 2024 & 2023:
i) Operating profit margin
ii) Return on parent’s equity
iii) Earnings per share
iv) Current ratio
v) Trade receivables days
vi) Total liabilities to total assets %

(b) Write a report to the directors of DPEF evaluating the inter-period financial performance and position of NK using the above six (6) ratios. The report should draw attention to how the non-financial metrics combine with the financial counterparts to showcase the prospects and viability of NK.                                                                      c) The concept of double materiality is relevant to sustainability impacts and dependencies. It
incorporates financial materiality and impact materiality. 

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  • 6 Marks

CR – Nov 2024 – L3 – Q5a – Financial Analysis and Investment Evaluation

Compute financial ratios for Nsawkaw PLC to evaluate its financial performance for investment recommendation.

Nsawkaw PLC (NK), a gold processing and trading company, has been identified by Djaraye Private Equity Fund (DPEF) as a target for long-term equity investment. As a financial consultant of DPEF, you have been tasked to evaluate the integrated financial condition of NK and make an investment recommendation.

Below are the summarised versions of NK’s Consolidated Financial Statements for the year ended June 30, 2024 (together with its comparative period):

Summarised Consolidated Statement of Profit or Loss for the year ended 30 June 2024

2024 (GH¢000) 2023 (GH¢000)
Revenue 2,538,000 2,125,000
Operational expenses (1,909,100) (1,592,900)
Interest costs (186,700) (157,250)
Taxation (234,000) (198,500)
Profit after tax 208,200 176,350
Other comprehensive income 17,900 10,550
Total comprehensive income 226,100 186,900

Summarised Consolidated Statement of Changes in Equity for the year ended 30 June 2024

Equity Holders of the Parent (GH¢000) Non-controlling Interests’ Equity (GH¢000) Total Equity (GH¢000)
2024
Balances b/d 457,200 65,600 522,800
Total comprehensive income 190,800 35,300 226,100
Dividends (110,000) (8,700) (118,700)
Balances c/d 538,000 92,200 630,200
2023
Balances b/d 355,000 46,650 401,650
Total comprehensive income 160,500 26,400 186,900
Dividends (58,300) (7,450) (65,750)
Balances c/d 457,200 65,600 522,800

Summarised Statement of Financial Position as at 30 June 2024

2024 (GH¢000) 2023 (GH¢000)
Non-current assets
Property, plant, and equipment 718,000 657,000
Others 156,000 99,000
Total Non-current assets 874,000 756,000
Current assets
Trade receivables 140,000 121,000
Others 236,500 123,050
Total Current assets 376,500 244,050
Total Assets 1,250,500 1,000,050
Total Equity and Liability 1,250,500 1,000,050

Additional information:

  1. The total number of equity shares outstanding was 1.2 million and 1.4 million at 30 June 2023 and 30 June 2024 respectively.
  2. Other comprehensive income attributable to non-controlling interests for the years ended 30 June 2023 and 2024 amounted to GH¢8.05 million and GH¢9.6 million respectively.
  3. Non-current liabilities at 30 June 2023 and 30 June 2024 amounted to GH¢250,800 and GH¢308,510 respectively.
  4. The following metrics have been gleaned from NK’s published sustainability reports across the two years:
Metric 2024 2023
Scope 1 & 2 carbon emissions (tonnes of CO2) 650 780
Scope 3 carbon emissions (tonnes of CO2) 2,400 2,380
Women in senior management (%) 21 16
Total recordable injury frequency rate (TRIFR) per 100 full-time workers 3.3 4.1

The scope and definitions of the above sustainability measures have remained materially unchanged across the two years.

Required:

Compute the following ratios for the years ended 2024 & 2023:

  1. Operating profit margin
  2. Return on parent’s equity
  3. Earnings per share
  4. Current ratio
  5. Trade receivables days
  6. Total liabilities to total assets %

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  • 15 Marks

FM – Nov 2016 – L3 – SC – Q6 – Strategic Performance Measurement

Evaluate Osamco Limited’s financial performance compared to industry benchmarks and discuss reasons for considering stock exchange listing.

Osamco Limited, manufacturer of wire and cables, was bought from its conglomerate parent company in a management buyout deal in August 2010. Six years later, the managers are considering the possibility of listing the company’s shares on the Nigerian Stock Exchange.

The following information is made available:

OSAMCO LIMITED
INCOME STATEMENT FOR THE YEAR ENDED JUNE 30, 2016

N’million Amount
Turnover 91.25
Cost of sales (79.00)
Profit before interest and taxation 12.25
Interest (3.25)
Profit before taxation 9.00
Taxation (1.25)
Profit attributable to ordinary shareholders 7.75
Dividend (0.75)
Retained profit 7.00

STATEMENT OF FINANCIAL POSITION AS AT JUNE 30, 2016

N’million Amount
Non-current assets (at cost less accumulated depreciation)
Land and buildings 9.00
Plant and machinery 24.75
Total non-current assets 33.75
Current assets
Inventories 11.00
Accounts receivable 11.75
Cash at bank 2.50
Total current assets 25.25
Total assets 59.00
Equity
Ordinary shares of N1 each 6.75
Reserves 24.25
Total equity 31.00
Non-current liabilities
Accounts payable due after more than one year: 12% Debenture 2018 5.50
Current liabilities
Trade accounts payable 17.50
Bank overdraft 5.00
Total current liabilities 22.50
Total equity and liabilities 59.00

Industry sector ratios:

Metric Industry Average
Return before interest and tax on long-term capital employed 24%
Return after tax on equity 16%
Operating profit as percentage of sales 11%
Current ratio 1.6:1
Quick (acid test) ratio 1.0:1
Total debt: equity (gearing) 24%
Dividend cover 4.0
Interest cover 4.5

Required:
a. Evaluate the financial state and performance of Osamco Limited by comparing it with that of its industry sector. (10 Marks)

b. Discuss FOUR probable reasons why the management of Osamco Limited is considering Stock Exchange listing. (5 Marks)

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  • 20 Marks

FM – May 2019 – L3 – Q7 – Working Capital Management

Evaluate the financial viability of accepting a new customer order and provide considerations for granting credit.

V Plc. manufactures engineering equipment. The company has received an order from a new customer for five machines at N5,000,000 each. V Plc.’s terms of sale are 10 percent of the sales value payable with the order. The deposit has been received from the new customer. The balance is payable 12 months after acceptance of the order by V Plc.

V Plc.’s past experience has been that only 60 percent of similar customers pay within 12 months. Customers who do not pay within 12 months are referred to a debt collection agency to pursue the debt. The agency has in the past had a 50 percent success rate of obtaining immediate payment once they became involved. When they are unsuccessful, the debt is written off by V Plc. The agency’s fee is N500,000 per order, payable by V Plc. with the request for service. This fee is not refundable if the debt is not recovered.

As an accountant in V Plc.’s credit control department, and based on the company’s past experience and on discussions with the sales and credit managers, you do not expect the pattern of payment and collection to change.

Incremental costs associated with the new customer’s order are expected to be N3,600,000 per machine, 70 percent of these costs are for materials and are incurred shortly after the order has been accepted. The remaining 30 percent is for all other costs, which you can assume are paid shortly before delivery, i.e., in 12 months’ time. The company is not at present operating at full production capacity.

A credit bureau has offered to provide error-free credit information about the new customer if the price is right.

V Plc.’s opportunity cost of capital is 16 percent. Ignore taxation.

Required:

a. Evaluate, from a purely financial point of view, if V Plc. should accept the order from the new customer based on the above information. (12 Marks)

b. Comment on what other factors should be considered before a decision to grant credit is taken. (3 Marks)

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  • 20 Marks

FM – May 2019 – L3 – Q2 – Strategic Performance Measurement

Calculate and analyze PH Plc.’s financial performance using EPS, dividend yield, dividend cover, and P/E ratio metrics.

The following financial information is available for PH Plc:

Year 2014 2015 2016 2017
Earnings attributed to ordinary shareholders (₦m) 200 225 205 230
Number of ordinary shares (millions) 2,000 2,100 2,100 1,900
Price per share (kobo) 220 305 290 260
Dividend per share (kobo) 5 7 8 8

Assume that share prices are as at the last day of each year.

Required:

a. Calculate PH Plc.’s earnings per share, dividend yield, dividend cover, and price/earnings ratio. Explain the meaning of each term and state their limitations. (14 Marks)
b. Explain why the changes that occurred in the figures calculated in (a) above over the past four years might have happened. (6 Marks)

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  • 20 Marks

FM – Nov 2014 – L3 – SB – Q2 – Corporate Restructuring

Analyze divestment strategies for Chelsy Plc’s divisions, compute finance needs, and assess buyout and sale implications.

Chelsy Plc has two manufacturing divisions, Bolts and Nuts. The Bolts division is profitable whereas the Nuts division is not. The company’s share price has consequently declined to 50 kobo per share from a price of N2.83 per share three years ago.

The board of directors is considering two proposals:
i. To cease trading and close down the company.
ii. To close the Nuts division and continue the Bolts division through a leveraged management buyout. The new company will continue to manufacture bolts only but will require an additional investment of N275 million to grow the Bolts division’s after-tax cash flows by 3.5 percent in perpetuity. The proceeds from the sale of the Nuts division will be applied to pay the division’s outstanding liabilities. The finance raised from the management buyout will be applied in paying any remaining liabilities, fund additional investment, and purchase the current equity shares at a premium of 20 percent.

The Nuts division is twice the size of the Bolts division in terms of the assets attributable to it.

Extracts from the most recent financial statements of Chelsy Plc are as follows:

Statement of Financial Position as at 31 December 2013

N’000
Non-current assets 605,000
Current assets 1,210,000
Share capital (40 kobo per share) 220,000
Reserves 55,000
Liabilities (non-current and current) 1,540,000

Comprehensive Income Statement for the year ended 31 December 2013

Division Revenue Costs (prior to depreciation, interest, and tax)
Bolts division 935,000 (660,000)
Nuts division 1,870,000 (2,035,000)
Depreciation, interest, and tax (combined): (187,000)
Loss: (77,000)

If the company’s assets are sold, the estimated realizable values are as follows:

N’000
Non-current assets 550,000
Current assets 605,000

Additional Information:

  1. Redundancy and other costs will be approximately N297 million if the whole company is closed and pro rata for individual divisions that are closed. These costs have priority for payment before any other liabilities in case of closure. The taxation effects relating to this may be ignored.
  2. Company income tax on profits is 30%, and it can be assumed that tax is payable in the year it is liable.
  3. Annual depreciation on non-current assets is 10%, and this is the amount of investment needed to maintain the current level of activity.
  4. The new company’s cost of capital is expected to be 11%.

Required:

(a) Discuss, briefly, the possible benefits of divesting Bolts division through a management buyout. (4 Marks)
(b) Estimate the return the creditors and the shareholders will receive in the event that Chelsy Plc is closed and all its assets sold. (3 Marks)
(c) Estimate the additional amount of finance needed and the value of the new company if only the assets of Nuts division are sold and the Bolts division is divested through a management buyout. (8 Marks)
(d) Discuss the issues that should be taken into consideration in relation to:
i. Seeking potential buyers and negotiating the price
ii. Due diligence
(Assume that the Nuts division is to be sold as a going concern). (5 Marks)

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  • 14 Marks

CR – May 2021 – L3 – Q3a – Presentation of Financial Statements (IAS 1)

Analyze Somolu Limited's financial performance and recommend whether Agege Plc should invest; discuss reporting quality improvements.

The Chief Executive Officer (CEO) of Agege Plc. has forwarded the draft financial statements of Somolu Limited through an e-mail to you as the company’s financial consultants.

In the e-mail, the CEO informed you that Agege Plc. is planning to acquire Somolu Limited. Somolu Limited is a private limited company that has recently applied for additional funds which was rejected from its current bankers on the basis that the company has insufficient assets to offer as security.

The draft financial statements of Somolu Limited as at December 31, 2019, are as follows:

Somolu Limited
Statement of profit or loss and other comprehensive income for the year ended December 31, 2019

Somolu Limited
Statement of financial position as at December 31, 2019

Required:

a. Carry out a critical analysis of the financial performance and position of Somolu
Limited together with recommendations as to whether Agege Limited should
consider the investment in Somolu Limited. (14 Marks)

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  • 1 Marks

AAA – Nov 2013 – L3 – A – Q10 – Assurance Engagements

This question assesses which elements are typically excluded from investigations related to investment decisions.

Investigation under investment decision will NOT include:
A. Loan facility decision
B. Purchase of shares
C. Purchase of business
D. Reporting on profit forecast
E. Partnership participation

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  • 20 Marks

FM – Nov 2018 – L3 – Q4 – Strategic Performance Measurement

Evaluate Yemi John Plc’s financial performance and analyze financing options for expansion in line with shareholder wealth and earnings growth.

Yemi John Plc. (YJ) is planning to raise N30 million in new finance for a major expansion of its existing business and is considering a rights issue, a placing, or an issue of bonds. The corporate objectives of YJ, as stated in its annual report, are to maximize the wealth of its shareholders and to achieve continuous growth in earnings per share. Recent financial information on YJ is as follows:

Year 2017 2016 2015 2014
Turnover (Nm) 28.0 24.0 19.1 16.8
Earnings before interest and tax (EBIT) (Nm) 9.8 8.5 7.5 6.8
Profit after tax (PAT) (Nm) 5.5 4.7 4.1 3.6
Dividends (Nm) 2.2 1.9 1.6 1.6
Ordinary shares (Nm) 5.5 5.5 5.5 5.5
Reserves (Nm) 13.7 10.4 7.6 5.1
8% Bonds, redeemable 2024 (Nm) 20 20 20 20
Share price (N) 8.64 5.74 3.35 2.67

The par value of the shares of YJ is N1.00 per share. The general level of inflation has averaged 4% per year in the period under consideration. The bonds of YJ are currently trading at their par value of N100. The values for the business sector of YJ are as follows:

  • Average return on capital employed: 25%
  • Average return on shareholders’ fund: 20%
  • Average interest coverage: 20 times
  • Average debt/equity ratio (market value basis): 50%
  • Return predicted by the capital asset pricing model: 14%

EBIT/closing total capital employed

Required:

a. Evaluate the financial performance of YJ, analyzing and discussing the extent to which the company has achieved its stated objectives of:
i. maximizing the wealth of its shareholders; and
ii. achieving continuous growth in earnings per share. (13 Marks)

Note: Up to 8 marks are available for financial analysis.

b. Analyze and discuss the relative merits of a rights issue, a placing, and an issue of bonds as ways of raising finance for the expansion. (7 Marks)

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  • 15 Marks

FM – Nov 2017 – L3 – Q7 – Portfolio Management

Evaluate investment risk in different portfolio scenarios and explain the implications of beta and alpha values for KT Plc’s equity.

a. In the context of the selection and holding of investments, discuss each of the following scenarios:

i. An investor holding only one security needs to be concerned with the unsystematic risk of that security. (3 Marks)

ii. However, an investor who holds a number of securities should take account of total risk. (3 Marks)

iii. An investor should never add to a portfolio an investment that yields a return less than the market rate of return. (3 Marks)

b. The equity beta of KT Plc. is 1.2 and the equity alpha is 1.4. Explain the meaning and significance of these values to the company. (6 Marks)

(Total 15 Marks)

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  • 4 Marks

CR – Nov 2020 – L3 – Q5c – Ratios for Lenders

Calculate two ratios of interest to a potential long-term lender for two years.

Calculate, for both years, TWO (2) ratios of interest to a potential long-term lender.

 

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  • 20 Marks

PM – May 2019 – L2 – Q4 – Balanced Scorecard

Analyze BOK's financial performance and evaluate its balanced scorecard metrics for decision-making.

BOK is an autonomous division of Large Plc. BOK carries out large engineering jobs to individual customer specifications. The manager of the division will retire within next year, and Henry Femi, the CEO of Large Plc., has used a recruitment agency to identify a suitable successor, Mary Tako. Henry believes that Mary has excellent relevant experience in another company in the country and has offered her a 4-year contract position at BOK. The terms of the offer include a generous compensation package linked to the profit earned by BOK during the 4 years. Henry believes that BOK has been a very successful division and that a high-calibre manager, such as Mary, has great potential to continue to expand that success. In order to impress Mary on the recent success of BOK, Henry provided her with the following comparative financial data about the recent performance of the division (Table 1):

Table 1: Comparative Financial Data

2018 2017
Turnover 27,000,000 26,000,000
Net profit 5,600,000 5,200,000
Bad debts 132,000 130,000

It can be assumed that the inflation rate in each of the two years was 3% per annum.

Mary indicated that she would need some additional information before deciding on whether to accept the employment offer. The following is an extract from a balanced scorecard (Table 2) which was prepared at Mary’s request:

Table 2: Balanced Scorecard Data

Theme 2018 2017
Customer theme:
Number of customers 120 100
Average revenue per customer (₦) 225,000 260,000
Market share 9% 8%
Internal process theme:
Percentage of jobs completed with errors 3% 4%
Average job completion time (days) 5.5 7
Learning & growth themes:
Staff turnover rate 10% 5%
Training expenditure (₦) 1,000,000 1,000,000

Required:

a. i. Analyze the change in the financial performance of BOK between 2017 and 2018 using the information provided in Table 1. (3 Marks)

ii. Evaluate the change in the performance of BOK between 2017 and 2018, using the information contained in the balanced scorecard (Table 2). In addition, discuss the significant reasons why this analysis may be more relevant than your answer to part (ai) in helping Mary to decide whether or not to accept the offer. (13 Marks)

b. Mary has indicated that she would only be willing to accept the employment offer if she can be convinced about the potential for growth in the division. As the outgoing manager, you are required to provide her with an analysis of BOK’s competitive position and growth prospects based on the information provided. (4 Marks)

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  • 20 Marks

FR – May 2018 – L2 – Q4 – Consolidated Financial Statements (IFRS 10)

Assess the financial performance and position of two companies using specified ratios and explain the limitations of ratio analysis.

Ibadan Nigeria Limited is considering acquiring a suitable private limited liability company. The board of directors engaged a financial consultant to analyze the financial position of two companies, Abuja Limited and Rivers Limited, which are both receptive to the acquisition. The draft financial statements of the two companies are as follows:

Statements of Profit or Loss

a. Draft a report to the chairman of the board of directors of Ibadan Limited to assess the financial performance and position of the two companies using the following specific ratios: (12 Marks) i. Profitability ratios: Gross profit percentage and net profit margin. ii. Liquidity ratios: Acid test ratio, current ratio, trade receivable period. iii. Long-term financial stability ratios: Gearing ratio and proprietary ratio. iv. Efficiency ratios: Total asset turnover and non-current asset turnover.

b. Explain the limitations of ratio analysis and further information that may be useful to the board of directors when making the acquisition decision. (8 Marks)

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  • 22 Marks

PSAF – Nov 2018 – L2 – Q4 – Government Accounting Concepts and Principles

Evaluate the viability of two local government projects using Pay Back Period and Accounting Rate of Return methods.

Sampolopolo Local Government has identified a vacant land beside its marriage registry building. The director of administration proposed that the land be used either for a cybercafé where the general public can browse, make phone calls, photocopy and carry out other computer services or for the construction of an entertainment event-hall that can be rented out on a commercial basis.
This idea was tabled at the council’s management meeting and unanimously accepted. However, the Finance and General Purposes Committee recommended five years for the project since the council secretariat building will be extended in the future to accommodate more offices for the increased staff strength, and this was approved.

The cost of building the cybercafé and the event-hall with necessary facilities and fittings as well as the expected cash inflows/profits as prepared by the director of administration are as follows:

Required:
As the consultant engaged by Sampolopolo Local Government, advise the Local Government on the more viable project using:
i. Pay Back Period (PBP) (7 Marks)
ii. Accounting Rate of Return (ARR) (13 Marks)

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  • 20 Marks

PM – Nov 2018 – L2 – Q3 – Working Capital Management

Prepare cash forecast, profitability, and liquidity ratio for Omegboeji Nigeria Ltd from 2015-2017.

Omegboeji Nigeria Limited is a trading company that specialises in buying and selling of bulk oil. The company is financed by a capital base of N24 million inclusive of reserves in a mix of 30% and 70% of debt and equity respectively. The company has been in the trading business for the past six years and has consistently adhered to its corporate policy on sales, purchases, and inventory management.

The company’s policy on sales is to ensure that sales proceeds are collected as follows:
(i) Cash Sales is 30% of the monthly sales.
(ii) The balance of the month’s sales is to be collected in the month following sales.

The policy on monthly purchases, which is in agreement with the supplier’s policy, is to pay for all supplies in the month following the month of purchase. The general policy of the company is that purchase cost for bulk oil represents 60% of the corresponding annual sales value while its inventory policy is to reserve 30% of the month’s purchases as closing inventory.

The following information is available for the five years 2013 to 2017:

Year Monthly Sales (N’000) Monthly Salaries (N’000) Monthly Rent (N’000) Monthly Expenses (N’000)
2013 12,000 800 400 350
2014 15,000 800 400 370
2015 16,800 960 400 390
2016 18,000 960 400 390
2017 24,000 1,080 400 380

Additional information:
(i) The company will purchase a motor vehicle in July 2016, which will be paid for in two instalments as follows:

  • First payment: 60% of cost in September 2016
  • Balance: To be paid in November 2016
    The cost of the motor vehicle is expected to be N7,500,000.

(ii)Annual depreciation for the motor vehicle will be 20% on a straight-line basis. Monthly expenses include annual depreciation for the motor vehicle.

(iii) The cash balance as of December 31, 2014, was N2,500,000.

(iv) The company’s salaries, rent, and expenses will be paid in the month during which they are due.

Required:
a. Prepare a cash forecast for 2015, 2016, and 2017, showing the closing cash balance at each year-end. (10 Marks)

b. Prepare a forecast profitability statement for 2015, 2016, and 2017. (7 Marks)

c. Determine and comment on the forecast liquidity ratio (current ratio) for 2017. (3 Marks)

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  • 1 Marks

BMF – May 2022 – L1 – SA – Q12 – Basics of Business Finance and Financial Markets

Calculating the return on average investment for a machine.

The return on average investment is
A. 15.78%
B. 16.78%
C. 17.78%
D. 18.78%
E. 19.78%

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  • 1 Marks

BMF – May 2022 – L1 – SA – Q11 – Basics of Business Finance and Financial Markets

Calculating the return on the original investment of a machine.

The return on (original) investment is
A. 10%
B. 15%
C. 20%
D. 25%
E. 30%

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  • 15 Marks

MI – May 2021 – L1 – SB – Q1b – Cost-Volume-Profit (CVP) Analysis

Calculate various financial metrics for Sekeseke Manufacturing.

Sekeseke manufacturing company sold 250,000 units of its product called “CHAIN” at N20 per unit. The variable costs of N15 per unit consist of manufacturing cost of N12 and selling expenses of N3. The fixed costs incurred evenly throughout the year amounted to N486,000 consisting of administrative overhead of N300,000 and selling overheads of N186,000.

You are required to calculate:
i. The breakeven point in Units and Naira (4 Marks)
ii. The contribution/sales ratio (2 Marks)
iii. The number of units that must be sold to earn a profit of N75,000 (2 Marks)
iv. The number of units that must be sold to earn an after-tax profit of N112,000, if the tax rate is 30% (3 Marks)
v. The number of units required to break even if the variable cost increased by 6% and fixed cost by 2.5% (4 Marks)

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  • 5 Marks

MI – May 2021 – L1 – SB – Q1a – Cost-Volume-Profit (CVP) Analysis

Identify five assumptions underlying cost-volume-profit analysis.

Cost-volume-profit analysis is used to show how costs and profits react or change
with changes in the volume of activity.

State FIVE assumptions underlying the above propositions

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  • 2 Marks

FR – Nov 2023 – L2 – Q4c – Financial Statement Analysis

State two limitations of using financial ratios for company performance analysis.

State TWO (2) limitations of ratios.

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