Financial management revision question and answer

CPA-Financial-Management-Section-3 Revision kit

Millenium Electronics Ltd. is a company which produces a wide range of electronic goods. It has recorded a strong and consistent growth during the last 10 years. The management of the company is now contemplating obtaining a stock market listing.

The company‟s financial statements for the last financial year are summarized below:


Fixed assets including freehold land and premises are shown at historical cost net of depreciation. The debenture is redeemable in two years although early redemption without a penalty is permissible.

The following information is also available regarding key financial indicators of the industry to which Millenium Electronics Ltd. belongs.

Required:
(a) Briefly explain why companies like Millenium Electronics Ltd. seek stock market listing.
(6 marks)
(b) Discuss the performance and financial health of Millenium Electronics Ltd. in relation to that of the industry as a whole. (10 marks)
(c) In what ways would you advise Millenium Electronics Ltd. to change its financial policy following flotation? (4 marks)
ANSWER
(a) A company such as millennium may seek a stock market listing for the following reasons:
(i) To allow access to a wider pool of finance
(ii) To improve marketability of the shares
(iii) To allow capital to be transferred to other ventures.
(iv) To improve the company – of quoted companies are commonly believed to be more financially stable.
(v) To facilitate growth acquisition.

(b) (i)Return on long term capital employed:
Operating II: equity + long term debt 100:69.7% 30.3%
(ii) Return on equity:

Profit attributable to ordinary shareholders equity 60% 280 21.4% 280 + 50
(iii) Operating profit margin:
Operating II: sales

(iv) 100: 800

Current ratio: 12.5%

Current Assets: Current liabilities 230: 200 1.15:1
(v) Acid test
Current Asset – stock: current liabilities

(vi) 130: 200

Gearing

Long term debt: equity 0.65:1
50 + 50:280 35.7%
(vi) Dividend cover

Profits attributed to equity: Dividends

60:5 12 times
(vii) Interest cover:

Profit before interest and tax: interest 100:30 3.33 times
These ratios can be used to evaluate performance in terms of profitability, liquidity and financial security.

In summary, profit performance is strong but there are significant weaknesses in both the liquidity and financial structure which need to be addressed.

(c) Following the flotation, millennium is likely to come under pressure to improve the pay out ratio and dividend performance of the shares. If it wishes to maintain a good share price and the ability to raise further finance in the future then it would be well advised to consider this seriously. It could also work towards covering the gearing ratio.

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