Question Tag: Return on Capital Employed

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  • 20 Marks

FR – May 2015 – L2 – SB – Q3 – Statement of Cash Flows (IAS 7)

Calculate and analyze financial ratios and prepare cash flows from operating activities for Galadanci Plc.

(a) Galadanci Plc, a telecommunications company, has the following financial statements for the years ending 31 December 2013 and 2014. Using the statements below, calculate specific ratios and analyze Galadanci Plc’s performance:

Statements of Profit or Loss and Other Comprehensive Income for the year ended

2014 (N’billion) 2013 (N’billion)
Revenue 2,430 1,638
Cost of Sales (1,701) (983)
Gross Profit 729 655
Administrative Costs (311) (180)
Distribution Costs (207) (117)
Finance Costs (36) (6)
Profit before Taxation 175 352
Income Tax Expense (54) (102)
Profit for the Year 121 250

Statements of Financial Position as at 31 December

Additional Information for 2014

  1. Galadanci Plc acquired 60% of Papanga Plc’s shares to diversify into agriculture.
  2. The company increased its mobile subscriber base, raising the average revenue per user.
  3. No dividends were received from Papanga Plc, and the share value remained constant.

Required:

  1. Calculate the following ratios for the year ended 31 December 2014, analyze Galadanci Plc’s performance, and comment on qualitative factors impacting the company:
    • Gross Profit Percentage
    • Return on Capital Employed (where capital employed = Total Assets – Current Liabilities)
    • Net Profit (PBIT) Percentage
    • Asset Turnover
    • Gearing Ratio
    • Debt/Equity Ratio (16 Marks)
  2. Prepare Galadanci Plc’s Cash Flows from Operating Activities using the indirect method according to IAS 7. (4 Marks)

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  • 30 Marks

FR – May 2024 – L2 – SA – Q1 – Statement of Cash Flows (IAS 7)

Preparation of financial statements for Adama PLC, including profit or loss, changes in equity, and memo on EPS and ROCE.

a. The following trial balance was extracted from the books of Adama Plc as at June 30, 2022:

Additional information:

  1. The value of the freehold land and buildings includes a land element of N266,800,000, and the estimated remaining life of the buildings at July 1, 2021, was 25 years. Depreciation on buildings is charged 65% to cost of sales and 35% to administrative expenses.
  2. The revenue includes N69,250,000 for an item of office equipment disposed of on November 30, 2021. The equipment had a carrying value of N46,060,000 at the date of sale. The equipment cost N75,000,000 when acquired three years ago.
  3. Included in the cost of sales is N82,600,000 incurred in the manufacture of new office equipment, which was put to use by Adama PLC on February 1, 2022.
  4. All office equipment is depreciated at 15% per annum using the reducing balance method, charged to cost of sales. Depreciation on all motor vehicles is at 20% per annum on a straight-line basis and charged to distribution costs. Depreciation is charged in full in the year of acquisition and no charge in the year of disposal.
  5. Following the conclusion of winding-up proceedings for one of Adama PLC’s customers, it was resolved to write off the sum of N26,450,000 due from the customer and to make an allowance for doubtful receivables of 2½% on the continuing trade receivables.
  6. The financial assets are equity instruments held at fair value through profit or loss, and they suffered an impairment loss of N12,700,000 at the year-end.
  7. The 3% redeemable loan notes were issued on October 1, 2021, under terms that provided for a large premium on redemption in 2025. These terms were interpreted by the finance director to mean an effective interest rate of 6½% per annum.
  8. The income tax expense for the year ended June 30, 2022, is estimated at N143,552,000, while the deferred tax payable for the same period is N12,520,000. There was an over-provision of N25,664,000 in respect of income tax for the previous trading year.
  9. The suspense account balance represents the corresponding credit entry for shares issued at a premium of 15 kobo per share, arising from the issue of 400,000 ordinary shares made during the year.
  10. The directors recommended a 20 kobo final dividend per ordinary share for the year and a transfer of N38,900,000 to the general reserve.

Required: Prepare for Adama PLC the following financial statements:

  1. Statement of profit or loss and other comprehensive income for the year ended June 30, 2022. (10 Marks)
  2. Statement of changes in equity for the same period. (4 Marks)
  3. Statement of financial position as of June 30, 2022. (10 Marks)

b. Some new trainee accountants in your organization discussed Earnings Per Share (EPS) and Return on Capital Employed (ROCE) as the best ratios for analyzing an entity’s financial performance. The finance director has requested a memo explaining these ratios and highlighting their limitations.

Required:
Prepare a memo to the finance director explaining the EPS and ROCE ratios and their limitations. (6 Marks)

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  • 20 Marks

PM – Nov 2020 – L2 – Q6 – Divisional Performance Measurement

Evaluate the performance of Lapez's divisions using ROCE and other performance measures and calculate the NPV of the proposed investment.

Lapez operates a chain of health and fitness clubs, located in state capitals in Nigeria. For easy administration, the clubs are structured into two divisions, the Northern and the Southern divisions. Each division has a General Manager who is responsible for revenue, cost, and investment decisions at their clubs. A bonus is awarded each year to the General Manager that generates the higher return on capital employed (ROCE).

The following summary information shows the results of the divisions for the past two years:

Year Ending 31st December Northern (2018) Southern (2018) Northern (2017) Southern (2017)
Revenue (N000) 2,700 3,720 2,850 3,375
Staff Costs (N000) 1,725 2,145 1,770 1,965
Other Operating Costs (N000) 690 1,012 750 930
Operating Profit (N000) 285 563 330 480
Capital Employed (N000) 750 1,350 1,125 1,800
Avg. Number of Members 6,880 9,425 7,050 8,320

Notes:

  1. Revenue is largely comprised of income from membership fees.
  2. Lapez uses the net book value of non-current assets as the capital employed. The capital employed figures in the table are the net book value of non-current assets for each division at the end of the year.
  3. Non-current assets are depreciated on a straight-line basis over five years with no residual value. No additions or disposals of non-current assets occurred in 2017 and 2018.
  4. Both divisions have a cost of capital of 15%.
  5. Ignore taxation and inflation.

However, investigations by Lapez’s management revealed that at the end of 2017, the General Manager of the Southern division rejected the opportunity to acquire a new building and equipment to set up a new fitness club at a total cost of ₦1,200,000. The building could have been purchased for ₦525,000, and it is assumed that the building would retain its value for five years, with no depreciation charged. The equipment would have cost ₦675,000 and would have been depreciated over five years according to Lapez’s policy. The investment would have occurred on January 1, 2018.

The forecasted annual profit and number of members for the proposed new club were as follows:

Description N000
Revenue 1,012.5
Staff Costs (556.5)
Other Operating Costs (incl. depreciation) (240.0)
Operating Profit 216.0
Avg. Number of Members 2,100

It is Lapez’s policy that investments of this type be appraised over five years using net present value (NPV).

Required:

a. Discuss the relative performance of the two divisions using Return on Capital Employed (ROCE) and TWO other performance measures that you think are appropriate. (15 Marks)

b. Calculate the net present value (NPV) of the investment. Ignore taxation and inflation. (5 Marks)

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  • 4 Marks

CR – Nov 2020 – L3 – Q5a – Return on Equity & Return on Capital Employed

Calculate and interpret return on equity and return on capital employed for Bounce Back Ltd for two years.

Bounce Back Ltd Financial Information:

Statement of Comprehensive Income for the year ended 30 November:

2019 2018
Profit before interest and tax GH¢2,200,000 GH¢1,570,000
Interest expense (GH¢170,000) (GH¢150,000)
Profit before tax GH¢2,030,000 GH¢1,420,000
Taxation (GH¢730,000) (GH¢520,000)
Profit after tax GH¢1,300,000 GH¢900,000
Dividends paid (GH¢250,000) (GH¢250,000)
Retained profit GH¢1,050,000 GH¢650,000

Statement of Financial Position as at 30 November:

2019 2018
Non-current assets (written-down value) GH¢6,350,000 GH¢5,600,000
Current assets
Trade receivables GH¢2,100,000 GH¢2,070,000
Inventories GH¢1,710,000 GH¢1,540,000
Total current assets GH¢3,810,000 GH¢3,610,000
Creditors: amounts due within one year
Trade payables GH¢1,040,000 GH¢1,130,000
Taxation GH¢550,000 GH¢450,000
Bank overdraft GH¢370,000 GH¢480,000
Total current liabilities GH¢1,960,000 GH¢2,060,000
Net current assets GH¢1,850,000 GH¢1,550,000
Total net assets GH¢8,200,000 GH¢7,150,000
Creditors: amounts due after more than one year
10% debentures GH¢1,500,000 GH¢1,500,000
Equity
Share capital (ordinary shares of 50p fully paid up) GH¢3,000,000 GH¢3,000,000
Retained earnings GH¢3,700,000 GH¢2,650,000
Total equity GH¢6,700,000 GH¢5,650,000
Total long-term liabilities and equity GH¢8,200,000 GH¢7,150,000

Required:

  1. Calculate, for both years, the return on equity and the return on capital employed.

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  • 20 Marks

MA – Nov 2019 – L2 – Q1a – Performance analysis

Calculation of key financial ratios for GRAT Authority and evaluation of financial performance from 2017 to 2018.

GRAT Authority operates passenger railway services and is responsible for the maintenance of track signaling equipment, and other facilities such as stations. In recent years it has been criticized for providing poor services to the traveling public in terms of punctuality, safety, and the standard of facilities offered to passengers. Last year, GRAT Authority invested over GH¢20 million in new carriages, station facilities, and track maintenance programs in an attempt to address these criticisms.

Summarized financial results for GRAT Authority for the last two years are given below:

Extracts of Statement of Profit or Loss account for the year ended 31 December

Statement of Financial Position as at 31 December

Required:

a) Calculate the following ratios for GRAT Authority for 2017 and 2018, clearly showing your workings.

i) Return on capital employed (ROCE)
ii) Net profit margin
iii) Asset turnover
iv) Current ratio

b) Evaluate the financial performance of the entity in 2017 and 2018 as revealed by the above ratios.

c) Suggest THREE (3) non-financial indicators that could be useful in measuring the performance of a passenger railway service and explain why your chosen indicators are important.

d) Explain the term short-termism and suggest ways in which a long-term view can be encouraged.
(Total: 20 marks)

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  • 20 Marks

FR – Nov 2021 – L2 – Q4 -Financial Statement Analysis

Analysis of financial ratios and performance of Bebebe Ltd for 2019 and 2020.

The following are the accounts of Bebebe Ltd (Bebebe), a company that manufactures playground equipment for the year ended 30 November 2020.

Statement of Comprehensive Income for the year ended 30 November:

Required:

a) Calculate, for both years, the return on equity and the return on capital employed. (4 marks)

b) Calculate, for both years, TWO (2) investment ratios to a potential investor. (4 marks)

c) Calculate, for both years, TWO (2) ratios of interest to a potential long-term lender. (4 marks)

d) Comment on the performance of Bebebe to a potential shareholder and lender using the ratios calculated above. (5 marks)

e) Explain THREE (3) weaknesses in these ratios.

(3 marks)

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  • 20 Marks

FR – Nov 2015 – L2 – Q2 – Financial Statement Analysis

This question requires calculating financial ratios and analyzing Kack Ltd's financial performance and position for the year ended 31 March 2015 compared to the previous year.

Kack Ltd is a listed company that assembles domestic electrical goods which it then sells to both wholesale and retail customers. Kack Ltd’s management was disappointed in the company’s results for the year ended 31 March 2014. In an attempt to improve performance, the following measures were taken early in the year ended 31 March 2015:

  • A national advertising campaign was undertaken.
  • Rebates to all wholesale customers purchasing goods above set quantity levels were introduced.
  • The assembly of certain lines ceased and was replaced by bought-in completed products. This allowed Kack Ltd to dispose of surplus plant.

Kack Ltd’s summarised financial statements for the year ended 31 March 2015 are set out below:

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2015

Description GHSm
Revenue (25% cash sales) 4,000
Cost of sales (3,450)
Gross profit 550
Operating expenses (370)
Operating profit 180
Profit on disposal of plant (note (i)) 40
Financial charges (20)
Profit before tax 200
Income tax expense (50)
Profit for the year 150

STATEMENT OF FINANCIAL POSITION
AS AT 31 MARCH 2015

Description GHSm GHSm
Non-current assets
Property, plant, and equipment (note (ii)) 550
Current assets
Inventory 250
Trade receivables 360
Bank nil
Total current assets 610
Total assets 1,160
Equity and liabilities
Equity
Stated capital (400m shares) 100
Income surplus 380
Total equity 480
Non-current liabilities
8% loan notes 200
Current liabilities
Bank overdraft 10
Trade payables 430
Current tax payables 40
Total current liabilities 480
Total equity and liabilities 1,160

Below are ratios calculated for the year ended 31 March 2014:

  • Return on year-end capital employed (profit before interest and tax over total assets less current liabilities): 28.1%
  • Net assets (equal to capital employed) turnover: 4 times
  • Gross profit margin: 17%
  • Net profit (before tax) margin: 6.3%
  • Current ratio: 1.6:1
  • Closing inventory holding period: 46 days
  • Trade receivables’ collection period: 45 days
  • Trade payables’ payment period: 55 days
  • Dividend yield: 3.75%
  • Dividend cover: 2 times

Notes:

  1. Kack Ltd received GHS 120 million from the sale of plant that had a carrying amount of GHS 80 million at the date of its sale.
  2. The market price of Kack Ltd’s share throughout the year averaged GHS 3.75 each.
  3. There were no issues or redemption of shares or loans during the year.
  4. Dividends paid during the year ended 31 March 2015 amounted to GHS 90 million, maintaining the same dividend paid in the year ended 31 March 2014.

Required:

a) Calculate ratios for the year ended 31 March 2015 (showing your workings) for Kack Ltd, equivalent to those provided above.
(10 marks)

b) Analyse the financial performance and position of Kack Ltd for the year ended 31 March 2015 compared to the previous year.
(10 marks)
(Total: 20 marks)

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  • 15 Marks

CR – May 2019 – L3 – Q4 – Analysis and interpretation of financial statements

The question requires calculation of financial ratios and analysis of the financial performance and cash position of Madina Ltd for the year ended 30 September 2018.

Below are the recently issued financial statements of Madina Ltd, a listed company, for the year ended 30 September 2018, together with comparatives for 2017.

Statement of Profit or Loss for the year ended 30 September:

Details 2018 (GH¢’000) 2017 (GH¢’000)
Revenue 125,000 90,000
Cost of Sales (100,000) (75,000)
Gross Profit 25,000 15,000
Operating Expenses (13,000) (11,000)
Finance Costs (4,000) –
Profit before Tax 8,000 4,000
Tax (at 25%) (2,000) (1,000)
Profit for the year 6,000 3,000

Statement of Financial Position as at 30 September:

Details 2018 (GH¢’000) 2017 (GH¢’000)
Non-Current Assets
Property, Plant, and Equipment 105,000 45,000
Goodwill 5,000 –
Total Non-Current Assets 110,000 45,000
Current Assets
Inventory 12,500 7,500
Receivables 6,500 4,000
Bank – 7,000
Total Current Assets 19,000 18,500
Total Assets 129,000 63,500
Equity and Liabilities
Equity
Share Capital 50,000 50,000
Retained Earnings 7,000 6,000
Total Equity 57,000 56,000
Non-Current Liabilities
8% Loan Notes 50,000 –
Current Liabilities
Bank Overdraft 8,500 –
Trade Payables 11,500 6,500
Current Tax Payable 2,000 1,000
Total Current Liabilities 22,000 7,500
Total Equity and Liabilities 129,000 63,500

Additional Information:

  • On 1 October 2017, Madina Ltd acquired 100% of the net assets of Aboabu Ltd for GH¢50 million. In order to finance this transaction, Madina Ltd issued GH¢50 million 8% loan notes on the acquisition date.
    Aboabu Ltd’s results for the year ended 30 September 2018 are shown below:

Aboabu Ltd’s Statement of Profit or Loss for the year ended 30 September:

Details GH¢’000
Revenue 35,000
Cost of Sales (20,000)
Gross Profit 15,000
Operating Expenses (4,000)
Profit before Tax 11,000
Tax (at 25%) (2,750)
Profit for the year 8,250
  • Aboabu Ltd has not paid any dividend during the year, but Madina Ltd paid a dividend of GH¢0.05 per share.
  • The following ratios have been calculated for Madina Ltd for the year ended 30 September 2017:
    • Return on capital employed: 7.1%
    • Gross profit margin: 16.7%
    • Net profit (before tax) margin: 4.4%

Required:

a) Calculate the equivalent ratios for Madina Ltd for 2018:
i) Including the results of Aboabu Ltd acquired during the year. (3 marks)
ii) Excluding all effects of the purchase of Aboabu Ltd. (3 marks)

b) Analyse the performance of Madina Ltd for the year ended 30 September 2018. (5 marks)

c) Analyse the cash position of Madina Ltd as at 30 September 2018. (4 marks)

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  • 20 Marks

FM – March 2023 – L2 – Q4 – DCF: taxation and inflation | Introduction to Investment Appraisal

Explain the stages in the capital investment decision-making process, compute the discounted payback period and Return on Capital Employed for an investment proposal, and describe categories of financial markets with examples.

a) Explain the stages in the Capital Investment decision-making process. (5 marks)

b) Dragon Ltd is evaluating an investment proposal to manufacture a product called “Chiputronic” and the information below has been provided by the Research and Development team:

  • Initial Investment: GH¢4 million
  • Selling Price (current price terms): GH¢40 per unit
  • Expected Selling Price Inflation: 3% per annum
  • Variable Operating Cost (current price terms): GH¢16 per unit
  • Fixed Operating Cost (current price terms): GH¢340,000
  • Expected Operating Cost Inflation: 4% per annum
Year Annual Demand (units)
1 70,000
2 90,000
3 130,000
4 50,000

It is expected that whatever is produced will be sold with no stock left, and there will be no scrap value expected at the end of the four years. The discount rate used in the company is 15%.

Required:
i) Compute the discounted payback period. (5 marks)
ii) Calculate the Return on Capital Employed (Accounting Rate of Return) based on average investment. (5 marks)

c) Financial markets facilitate the interaction between those who need funds and those who have funds to invest.

Required:
Explain TWO (2) categories of financial markets and give TWO (2) examples of each. (5 marks)

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  • 10 Marks

FM – April 2022 – L2 – Q1b – Capital structure

Calculate the capital structure of Boom Ltd and determine the earnings required to achieve a 25% return for equity holders.

Boom Ltd is into the provision of online conference call facilities which has become popular due to the rising trend in Covid-19 cases in Ghana. The company has 10 million issued shares currently at GH¢50 each, 3 million preference shares trading at GH¢25 each, and 5,000 bonds also trading at GH¢600 each.

Required:
i) Calculate the Capital Structure of the Company. (4 marks)
ii) How much should the company earn annually to achieve a return of 25% per annum on capital employed for equity holders if the dividend rate on preference shares per annum is 20% and the coupon on the bonds is 18%? In Ghana, interest paid on debt is tax deductible and corporate tax is at 25%. (6 marks)

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  • 20 Marks

FR – May 2015 – L2 – SB – Q3 – Statement of Cash Flows (IAS 7)

Calculate and analyze financial ratios and prepare cash flows from operating activities for Galadanci Plc.

(a) Galadanci Plc, a telecommunications company, has the following financial statements for the years ending 31 December 2013 and 2014. Using the statements below, calculate specific ratios and analyze Galadanci Plc’s performance:

Statements of Profit or Loss and Other Comprehensive Income for the year ended

2014 (N’billion) 2013 (N’billion)
Revenue 2,430 1,638
Cost of Sales (1,701) (983)
Gross Profit 729 655
Administrative Costs (311) (180)
Distribution Costs (207) (117)
Finance Costs (36) (6)
Profit before Taxation 175 352
Income Tax Expense (54) (102)
Profit for the Year 121 250

Statements of Financial Position as at 31 December

Additional Information for 2014

  1. Galadanci Plc acquired 60% of Papanga Plc’s shares to diversify into agriculture.
  2. The company increased its mobile subscriber base, raising the average revenue per user.
  3. No dividends were received from Papanga Plc, and the share value remained constant.

Required:

  1. Calculate the following ratios for the year ended 31 December 2014, analyze Galadanci Plc’s performance, and comment on qualitative factors impacting the company:
    • Gross Profit Percentage
    • Return on Capital Employed (where capital employed = Total Assets – Current Liabilities)
    • Net Profit (PBIT) Percentage
    • Asset Turnover
    • Gearing Ratio
    • Debt/Equity Ratio (16 Marks)
  2. Prepare Galadanci Plc’s Cash Flows from Operating Activities using the indirect method according to IAS 7. (4 Marks)

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  • 30 Marks

FR – May 2024 – L2 – SA – Q1 – Statement of Cash Flows (IAS 7)

Preparation of financial statements for Adama PLC, including profit or loss, changes in equity, and memo on EPS and ROCE.

a. The following trial balance was extracted from the books of Adama Plc as at June 30, 2022:

Additional information:

  1. The value of the freehold land and buildings includes a land element of N266,800,000, and the estimated remaining life of the buildings at July 1, 2021, was 25 years. Depreciation on buildings is charged 65% to cost of sales and 35% to administrative expenses.
  2. The revenue includes N69,250,000 for an item of office equipment disposed of on November 30, 2021. The equipment had a carrying value of N46,060,000 at the date of sale. The equipment cost N75,000,000 when acquired three years ago.
  3. Included in the cost of sales is N82,600,000 incurred in the manufacture of new office equipment, which was put to use by Adama PLC on February 1, 2022.
  4. All office equipment is depreciated at 15% per annum using the reducing balance method, charged to cost of sales. Depreciation on all motor vehicles is at 20% per annum on a straight-line basis and charged to distribution costs. Depreciation is charged in full in the year of acquisition and no charge in the year of disposal.
  5. Following the conclusion of winding-up proceedings for one of Adama PLC’s customers, it was resolved to write off the sum of N26,450,000 due from the customer and to make an allowance for doubtful receivables of 2½% on the continuing trade receivables.
  6. The financial assets are equity instruments held at fair value through profit or loss, and they suffered an impairment loss of N12,700,000 at the year-end.
  7. The 3% redeemable loan notes were issued on October 1, 2021, under terms that provided for a large premium on redemption in 2025. These terms were interpreted by the finance director to mean an effective interest rate of 6½% per annum.
  8. The income tax expense for the year ended June 30, 2022, is estimated at N143,552,000, while the deferred tax payable for the same period is N12,520,000. There was an over-provision of N25,664,000 in respect of income tax for the previous trading year.
  9. The suspense account balance represents the corresponding credit entry for shares issued at a premium of 15 kobo per share, arising from the issue of 400,000 ordinary shares made during the year.
  10. The directors recommended a 20 kobo final dividend per ordinary share for the year and a transfer of N38,900,000 to the general reserve.

Required: Prepare for Adama PLC the following financial statements:

  1. Statement of profit or loss and other comprehensive income for the year ended June 30, 2022. (10 Marks)
  2. Statement of changes in equity for the same period. (4 Marks)
  3. Statement of financial position as of June 30, 2022. (10 Marks)

b. Some new trainee accountants in your organization discussed Earnings Per Share (EPS) and Return on Capital Employed (ROCE) as the best ratios for analyzing an entity’s financial performance. The finance director has requested a memo explaining these ratios and highlighting their limitations.

Required:
Prepare a memo to the finance director explaining the EPS and ROCE ratios and their limitations. (6 Marks)

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  • 20 Marks

PM – Nov 2020 – L2 – Q6 – Divisional Performance Measurement

Evaluate the performance of Lapez's divisions using ROCE and other performance measures and calculate the NPV of the proposed investment.

Lapez operates a chain of health and fitness clubs, located in state capitals in Nigeria. For easy administration, the clubs are structured into two divisions, the Northern and the Southern divisions. Each division has a General Manager who is responsible for revenue, cost, and investment decisions at their clubs. A bonus is awarded each year to the General Manager that generates the higher return on capital employed (ROCE).

The following summary information shows the results of the divisions for the past two years:

Year Ending 31st December Northern (2018) Southern (2018) Northern (2017) Southern (2017)
Revenue (N000) 2,700 3,720 2,850 3,375
Staff Costs (N000) 1,725 2,145 1,770 1,965
Other Operating Costs (N000) 690 1,012 750 930
Operating Profit (N000) 285 563 330 480
Capital Employed (N000) 750 1,350 1,125 1,800
Avg. Number of Members 6,880 9,425 7,050 8,320

Notes:

  1. Revenue is largely comprised of income from membership fees.
  2. Lapez uses the net book value of non-current assets as the capital employed. The capital employed figures in the table are the net book value of non-current assets for each division at the end of the year.
  3. Non-current assets are depreciated on a straight-line basis over five years with no residual value. No additions or disposals of non-current assets occurred in 2017 and 2018.
  4. Both divisions have a cost of capital of 15%.
  5. Ignore taxation and inflation.

However, investigations by Lapez’s management revealed that at the end of 2017, the General Manager of the Southern division rejected the opportunity to acquire a new building and equipment to set up a new fitness club at a total cost of ₦1,200,000. The building could have been purchased for ₦525,000, and it is assumed that the building would retain its value for five years, with no depreciation charged. The equipment would have cost ₦675,000 and would have been depreciated over five years according to Lapez’s policy. The investment would have occurred on January 1, 2018.

The forecasted annual profit and number of members for the proposed new club were as follows:

Description N000
Revenue 1,012.5
Staff Costs (556.5)
Other Operating Costs (incl. depreciation) (240.0)
Operating Profit 216.0
Avg. Number of Members 2,100

It is Lapez’s policy that investments of this type be appraised over five years using net present value (NPV).

Required:

a. Discuss the relative performance of the two divisions using Return on Capital Employed (ROCE) and TWO other performance measures that you think are appropriate. (15 Marks)

b. Calculate the net present value (NPV) of the investment. Ignore taxation and inflation. (5 Marks)

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  • 4 Marks

CR – Nov 2020 – L3 – Q5a – Return on Equity & Return on Capital Employed

Calculate and interpret return on equity and return on capital employed for Bounce Back Ltd for two years.

Bounce Back Ltd Financial Information:

Statement of Comprehensive Income for the year ended 30 November:

2019 2018
Profit before interest and tax GH¢2,200,000 GH¢1,570,000
Interest expense (GH¢170,000) (GH¢150,000)
Profit before tax GH¢2,030,000 GH¢1,420,000
Taxation (GH¢730,000) (GH¢520,000)
Profit after tax GH¢1,300,000 GH¢900,000
Dividends paid (GH¢250,000) (GH¢250,000)
Retained profit GH¢1,050,000 GH¢650,000

Statement of Financial Position as at 30 November:

2019 2018
Non-current assets (written-down value) GH¢6,350,000 GH¢5,600,000
Current assets
Trade receivables GH¢2,100,000 GH¢2,070,000
Inventories GH¢1,710,000 GH¢1,540,000
Total current assets GH¢3,810,000 GH¢3,610,000
Creditors: amounts due within one year
Trade payables GH¢1,040,000 GH¢1,130,000
Taxation GH¢550,000 GH¢450,000
Bank overdraft GH¢370,000 GH¢480,000
Total current liabilities GH¢1,960,000 GH¢2,060,000
Net current assets GH¢1,850,000 GH¢1,550,000
Total net assets GH¢8,200,000 GH¢7,150,000
Creditors: amounts due after more than one year
10% debentures GH¢1,500,000 GH¢1,500,000
Equity
Share capital (ordinary shares of 50p fully paid up) GH¢3,000,000 GH¢3,000,000
Retained earnings GH¢3,700,000 GH¢2,650,000
Total equity GH¢6,700,000 GH¢5,650,000
Total long-term liabilities and equity GH¢8,200,000 GH¢7,150,000

Required:

  1. Calculate, for both years, the return on equity and the return on capital employed.

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  • 20 Marks

MA – Nov 2019 – L2 – Q1a – Performance analysis

Calculation of key financial ratios for GRAT Authority and evaluation of financial performance from 2017 to 2018.

GRAT Authority operates passenger railway services and is responsible for the maintenance of track signaling equipment, and other facilities such as stations. In recent years it has been criticized for providing poor services to the traveling public in terms of punctuality, safety, and the standard of facilities offered to passengers. Last year, GRAT Authority invested over GH¢20 million in new carriages, station facilities, and track maintenance programs in an attempt to address these criticisms.

Summarized financial results for GRAT Authority for the last two years are given below:

Extracts of Statement of Profit or Loss account for the year ended 31 December

Statement of Financial Position as at 31 December

Required:

a) Calculate the following ratios for GRAT Authority for 2017 and 2018, clearly showing your workings.

i) Return on capital employed (ROCE)
ii) Net profit margin
iii) Asset turnover
iv) Current ratio

b) Evaluate the financial performance of the entity in 2017 and 2018 as revealed by the above ratios.

c) Suggest THREE (3) non-financial indicators that could be useful in measuring the performance of a passenger railway service and explain why your chosen indicators are important.

d) Explain the term short-termism and suggest ways in which a long-term view can be encouraged.
(Total: 20 marks)

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  • 20 Marks

FR – Nov 2021 – L2 – Q4 -Financial Statement Analysis

Analysis of financial ratios and performance of Bebebe Ltd for 2019 and 2020.

The following are the accounts of Bebebe Ltd (Bebebe), a company that manufactures playground equipment for the year ended 30 November 2020.

Statement of Comprehensive Income for the year ended 30 November:

Required:

a) Calculate, for both years, the return on equity and the return on capital employed. (4 marks)

b) Calculate, for both years, TWO (2) investment ratios to a potential investor. (4 marks)

c) Calculate, for both years, TWO (2) ratios of interest to a potential long-term lender. (4 marks)

d) Comment on the performance of Bebebe to a potential shareholder and lender using the ratios calculated above. (5 marks)

e) Explain THREE (3) weaknesses in these ratios.

(3 marks)

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  • 20 Marks

FR – Nov 2015 – L2 – Q2 – Financial Statement Analysis

This question requires calculating financial ratios and analyzing Kack Ltd's financial performance and position for the year ended 31 March 2015 compared to the previous year.

Kack Ltd is a listed company that assembles domestic electrical goods which it then sells to both wholesale and retail customers. Kack Ltd’s management was disappointed in the company’s results for the year ended 31 March 2014. In an attempt to improve performance, the following measures were taken early in the year ended 31 March 2015:

  • A national advertising campaign was undertaken.
  • Rebates to all wholesale customers purchasing goods above set quantity levels were introduced.
  • The assembly of certain lines ceased and was replaced by bought-in completed products. This allowed Kack Ltd to dispose of surplus plant.

Kack Ltd’s summarised financial statements for the year ended 31 March 2015 are set out below:

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2015

Description GHSm
Revenue (25% cash sales) 4,000
Cost of sales (3,450)
Gross profit 550
Operating expenses (370)
Operating profit 180
Profit on disposal of plant (note (i)) 40
Financial charges (20)
Profit before tax 200
Income tax expense (50)
Profit for the year 150

STATEMENT OF FINANCIAL POSITION
AS AT 31 MARCH 2015

Description GHSm GHSm
Non-current assets
Property, plant, and equipment (note (ii)) 550
Current assets
Inventory 250
Trade receivables 360
Bank nil
Total current assets 610
Total assets 1,160
Equity and liabilities
Equity
Stated capital (400m shares) 100
Income surplus 380
Total equity 480
Non-current liabilities
8% loan notes 200
Current liabilities
Bank overdraft 10
Trade payables 430
Current tax payables 40
Total current liabilities 480
Total equity and liabilities 1,160

Below are ratios calculated for the year ended 31 March 2014:

  • Return on year-end capital employed (profit before interest and tax over total assets less current liabilities): 28.1%
  • Net assets (equal to capital employed) turnover: 4 times
  • Gross profit margin: 17%
  • Net profit (before tax) margin: 6.3%
  • Current ratio: 1.6:1
  • Closing inventory holding period: 46 days
  • Trade receivables’ collection period: 45 days
  • Trade payables’ payment period: 55 days
  • Dividend yield: 3.75%
  • Dividend cover: 2 times

Notes:

  1. Kack Ltd received GHS 120 million from the sale of plant that had a carrying amount of GHS 80 million at the date of its sale.
  2. The market price of Kack Ltd’s share throughout the year averaged GHS 3.75 each.
  3. There were no issues or redemption of shares or loans during the year.
  4. Dividends paid during the year ended 31 March 2015 amounted to GHS 90 million, maintaining the same dividend paid in the year ended 31 March 2014.

Required:

a) Calculate ratios for the year ended 31 March 2015 (showing your workings) for Kack Ltd, equivalent to those provided above.
(10 marks)

b) Analyse the financial performance and position of Kack Ltd for the year ended 31 March 2015 compared to the previous year.
(10 marks)
(Total: 20 marks)

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  • 15 Marks

CR – May 2019 – L3 – Q4 – Analysis and interpretation of financial statements

The question requires calculation of financial ratios and analysis of the financial performance and cash position of Madina Ltd for the year ended 30 September 2018.

Below are the recently issued financial statements of Madina Ltd, a listed company, for the year ended 30 September 2018, together with comparatives for 2017.

Statement of Profit or Loss for the year ended 30 September:

Details 2018 (GH¢’000) 2017 (GH¢’000)
Revenue 125,000 90,000
Cost of Sales (100,000) (75,000)
Gross Profit 25,000 15,000
Operating Expenses (13,000) (11,000)
Finance Costs (4,000) –
Profit before Tax 8,000 4,000
Tax (at 25%) (2,000) (1,000)
Profit for the year 6,000 3,000

Statement of Financial Position as at 30 September:

Details 2018 (GH¢’000) 2017 (GH¢’000)
Non-Current Assets
Property, Plant, and Equipment 105,000 45,000
Goodwill 5,000 –
Total Non-Current Assets 110,000 45,000
Current Assets
Inventory 12,500 7,500
Receivables 6,500 4,000
Bank – 7,000
Total Current Assets 19,000 18,500
Total Assets 129,000 63,500
Equity and Liabilities
Equity
Share Capital 50,000 50,000
Retained Earnings 7,000 6,000
Total Equity 57,000 56,000
Non-Current Liabilities
8% Loan Notes 50,000 –
Current Liabilities
Bank Overdraft 8,500 –
Trade Payables 11,500 6,500
Current Tax Payable 2,000 1,000
Total Current Liabilities 22,000 7,500
Total Equity and Liabilities 129,000 63,500

Additional Information:

  • On 1 October 2017, Madina Ltd acquired 100% of the net assets of Aboabu Ltd for GH¢50 million. In order to finance this transaction, Madina Ltd issued GH¢50 million 8% loan notes on the acquisition date.
    Aboabu Ltd’s results for the year ended 30 September 2018 are shown below:

Aboabu Ltd’s Statement of Profit or Loss for the year ended 30 September:

Details GH¢’000
Revenue 35,000
Cost of Sales (20,000)
Gross Profit 15,000
Operating Expenses (4,000)
Profit before Tax 11,000
Tax (at 25%) (2,750)
Profit for the year 8,250
  • Aboabu Ltd has not paid any dividend during the year, but Madina Ltd paid a dividend of GH¢0.05 per share.
  • The following ratios have been calculated for Madina Ltd for the year ended 30 September 2017:
    • Return on capital employed: 7.1%
    • Gross profit margin: 16.7%
    • Net profit (before tax) margin: 4.4%

Required:

a) Calculate the equivalent ratios for Madina Ltd for 2018:
i) Including the results of Aboabu Ltd acquired during the year. (3 marks)
ii) Excluding all effects of the purchase of Aboabu Ltd. (3 marks)

b) Analyse the performance of Madina Ltd for the year ended 30 September 2018. (5 marks)

c) Analyse the cash position of Madina Ltd as at 30 September 2018. (4 marks)

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  • 20 Marks

FM – March 2023 – L2 – Q4 – DCF: taxation and inflation | Introduction to Investment Appraisal

Explain the stages in the capital investment decision-making process, compute the discounted payback period and Return on Capital Employed for an investment proposal, and describe categories of financial markets with examples.

a) Explain the stages in the Capital Investment decision-making process. (5 marks)

b) Dragon Ltd is evaluating an investment proposal to manufacture a product called “Chiputronic” and the information below has been provided by the Research and Development team:

  • Initial Investment: GH¢4 million
  • Selling Price (current price terms): GH¢40 per unit
  • Expected Selling Price Inflation: 3% per annum
  • Variable Operating Cost (current price terms): GH¢16 per unit
  • Fixed Operating Cost (current price terms): GH¢340,000
  • Expected Operating Cost Inflation: 4% per annum
Year Annual Demand (units)
1 70,000
2 90,000
3 130,000
4 50,000

It is expected that whatever is produced will be sold with no stock left, and there will be no scrap value expected at the end of the four years. The discount rate used in the company is 15%.

Required:
i) Compute the discounted payback period. (5 marks)
ii) Calculate the Return on Capital Employed (Accounting Rate of Return) based on average investment. (5 marks)

c) Financial markets facilitate the interaction between those who need funds and those who have funds to invest.

Required:
Explain TWO (2) categories of financial markets and give TWO (2) examples of each. (5 marks)

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  • 10 Marks

FM – April 2022 – L2 – Q1b – Capital structure

Calculate the capital structure of Boom Ltd and determine the earnings required to achieve a 25% return for equity holders.

Boom Ltd is into the provision of online conference call facilities which has become popular due to the rising trend in Covid-19 cases in Ghana. The company has 10 million issued shares currently at GH¢50 each, 3 million preference shares trading at GH¢25 each, and 5,000 bonds also trading at GH¢600 each.

Required:
i) Calculate the Capital Structure of the Company. (4 marks)
ii) How much should the company earn annually to achieve a return of 25% per annum on capital employed for equity holders if the dividend rate on preference shares per annum is 20% and the coupon on the bonds is 18%? In Ghana, interest paid on debt is tax deductible and corporate tax is at 25%. (6 marks)

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