- 20 Marks
CML – APRIL 2023 – L3 – Q1 – Gold Coast Shipping Company Ltd Financing Proposition
Critically examine the financing proposition from Gold Coast Shipping Company Ltd for a USD 2.0 million down payment on a new ship, using provided company background, operations, and financial statements for 2020-2022.
Question
Mr. Bampoh Humphrey is the Board Chairman and CEO of Gold Coast Shipping Company Ltd. He owns 80 percent of the shares of the company with his foreign Partner Jones Smith, a retired Chairman of Elder Dempster Shipping Company owning the remaining 20%.
The two shareholders acquired the company from the Divestiture Implementation Committee in 1995 when the government divested its shareholding in the national shipping line the Black Star Line. Mr. Bampoh is known to be highly connected with the government in power at the time of AFC.
The company is engaged in transportation of primary products such as bauxite, gold and manganese ore from the country abroad and the transportation of consumer goods in container ships throughout the world.
The company has a fleet of ten cargo ships and ten container ships. It has three main offices located in Tema, Takoradi and London in the UK.
The company has operated an impressive account with you since the acquisition of the national shipping line, until in recent times when you noticed a sharp deterioration in its account operations. Following your painstaking investigation you established that the company incurred a huge loss when a cargo of bauxite was diverted on the high seas and the goods stolen. The ship was later discovered to have been sunken in the high seas to hide the evidence. Another problem you observed was that their fleet was becoming aged and one of them needs immediate replacement.
Each office of the company has an Office Manager all of whom are experienced expatriate shipping managers poached from international shipping companies.
The cost of purchase and delivery of one ship is estimated at USD 5.0 million, and the company is requesting for financial support from the bank to make a down payment of USD 2.0 million for the ship. The company proposes to pay the bank over a period of five years whilst the remainder of the cost of the ship is to be paid over the next period of ten years.
Critically examine this proposition using the information above and the related financial statements provided below.
Gold Star Shipping Ltd Statement of Comprehensive Income as at 31 Dec 2020 GHC
Total Revenue Cost of Revenue Gross Profit Overheads Depreciation Operating Profit Interest Paid Profit Before Tax Tax Profit After Tax 2021 GHC 13,700,000 6,165,000 7,535,000 1,575,500 1,337,000 4,622,500 480,000 4,142,500 1,035,625 3,106,875 2021 GHC 14,400,000 6,912,000 7,488,000 1,843,200 1,514,000 4,130,800 352,000 3,778,800 944,700 2,834,100 2022 GHC 14,920,000 7,758,400 7,161,600 2,333,488 1,564,000 3,264,112 312,500 2,951,612 737,903 2,213,709
Gold Star Shipping Ltd Balance Sheet as at 31st Dec
| Noncurrent Assets | 2020 | 2021 | 2022 |
|---|---|---|---|
| Building | 147,000 | 238,000 | 327,000 |
| Equipment | 9,000,000 | 11,325,000 | 10,150,000 |
| Motor Vehicles | 720,000 | 480,000 | 432,000 |
| Furniture and Fixtures | 350,000 | 260,000 | 170,000 |
| Total | 10,217,000 | 12,303,000 | 11,079,000 |
| Current Assets | |||
| Inventory | 135,000 | 185,000 | 197,000 |
| Receivables | 245,000 | 254,000 | 1,998,000 |
| Prepayments | 146,200 | 158,400 | 268,700 |
| Bank | 950,800 | 241,250 | 746,805 |
| 1,477,000 | 838,650 | 3,210,505 | |
| Current Liabilities | |||
| Trade Payables | 125,000 | 135,600 | 156,400 |
| Overdraft | 45,000 | 65,000 | 85,200 |
| Total Current | 170,000 | 200,600 | 241,600 |
| Liabilities | |||
| Net Current Assets | 1,307,000 | 638,050 | 2,968,905 |
| Net Assets | 11,524,000 | 12,941,050 | 14,047,905 |
| Capital | |||
| Share Capital | 10,000,000 | 10,000,000 | 10,000,000 |
| Income Surplus | 1,524,000 | 2,941,050 | 4,047,905 |
| 11,524,000 | 12,941,050 | 14,047,905 |
RATIOS 2020 2021 2022
Sales Growth 5.11% 3.61%
Receivable Days 7 6 49
Payable Days 7 7 7
Inventory Turnover Days 8 10 9
Gross Margin 55% 52% 48%
Overhead % 12% 13% 16%
Net Margin 30.24% 26.24% 19.78%
Interest Cover 9.63 11.74 10.45
Current Ratio 8.69 4.18 13.29
Quick Ratio 7.89 3.26 12.47
Tax Rate 25% 25% 25%
Dividend Payout RATIO 50% 50% 50%
Inventory to Sales 0.01 0.01 0.01
Receivables to Sales 0.01 0.01 0.13
Payables to Sales 0.01 0.01 0.01
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