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Berri Co

Berri Co would like to acquire 100% of a suitable private entity. It has obtained the following draft financial statements for two entities, Volka and Redel. They operate in the same industry and their managements have indicated that they would be receptive to a takeover.

Statements of profit or loss for the year ended 30 September 2020

 Volka Redel $000$000 Revenue 12,000 20,500 Cost of sales (10,500) (18,000) Gross profit 1,500 2,500 Operating expenses (240) (500) Finance costs loan (210) (300) overdraft Nil (10) lease Nil (290) Profit before tax 1,050 1,400 Income tax expense (150) (400) Profit for the year 900 1,000 Note: Dividends paid during the year 250 700

Statement of financial position as at 30 September 2020

 Assets Non‐current assets Freehold factory (note (i) 4,400 Nil Owned plant (note (ii)) 5,000 2,200 Right‐of‐use asset (note (ii)) Nil 5,300 9,400 7,500 Current assets Inventory 2,000 3,600 Trade receivables 2,400 3,700 Bank 600 5,000 Nil 7,300 Total assets 14,400 14,800 Equity and liabilities Equity shares of $1 each 2,000 2,000 Property revaluation surplus 900 Nil Retained earnings 2,600 3,500 800 800 5,500 2,800 Non‐current liabilities Lease liabilities (note (iii)) Nil 3,200 7% loan notes 3,000 Nil 10% loan notes Nil 3,000 Deferred tax 600 100 Government grants 1,200 4,800 Nil 6,300 Current liabilities Bank overdraft Nil 1,200 Trade payables 3,100 3,800 Government grants 400 Nil Lease liabilities (note (iii)) Nil 500 Taxation 600 4,100 200 5,700 Total equity and liabilities 14,400 14,800 Volka Rebel$000                              \$000

Owned plant – cost                                           8,000                            10,000

Right‐of‐use plant – initial value                      Nil                                 7,500

There were no disposals of plant during the year by either entity.

3. The interest rate implicit within Rebel’s leases is 7.5% per annum. For the purpose of calculating ROCE and gearing, all lease obligations are treated as long‐term interest bearing borrowings.

4. The following ratios have been calculated for Volka and can be taken to be correct:

Return on year end capital employed (ROCE)                                                14.8%

(capital employed taken as shareholders’ funds plus long‐term interest

bearing borrowings – see note (iii) above)

Gross profit margin                                                                                             12.5%

Operating profit margin                                                                                     10.5%

Current ratio                                                                                                     1.2:1

Closing inventory holding period                                                                       70 days

Trade receivables’ collection period                                                                   73 days

Trade payables’ payment period (using cost of sales)                                           108 days

Gearing (see note (iii) above)                                                                             35.3%

Required:

A. Calculate for Rebel the ratios equivalent to all those given for Volka above.

B. Assess the relative performance and financial position of Volka and Rebe; for the year ended 30 September 2020 to inform the directors of Berri Co in their acquisition decision.
C. Outline the problems in using ratios for comparison purposes between entities, and suggest what additional information would be useful for Berri Co in reaching its decision.