Question 1 Ocean Limited is an old-established clothing retailer Uzbekistan. The company operates from expensive city-centre premises and offers a high standard of customer service. The company's customers are willing to pay top prices to shop in comfort, and one of its competitive advantages is customers royalty. The following financial ratios are related to the company's performance for the years ended 30 June 2019 and 2020. Ratios 2019 2020 Current ratio 3 1.5 Acid-test ratio 1.0 0.6 Inventory turnover (times) 10 6.8 Debts to total assets 20 50 Gross profit percentages 48% 29% Operating profit percentage 19.5% 11.3% Return on capital employed 13% 4.5% Return on equity 20.5% 10.7% Interest cover (times) 6 3 Dividend cover 4 1.5 Required: You have been engaged by the company to analyse the performance of the company for the last two years. Write a report to the Board of Directors analysing the company's performance and provide recommendations to improve on its competitive advantages in the business environment and operation. (Total 33 marks)
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Stock Valuation at Ragan Engines Larissa has been talking with the company's directors about the future of East Coast Yachts. To this point, the company has used outside suppliers for various key components of the company's yachts, including engines. Larissa has decided that East Coast Yachts should consider the purchase of an engine manufacturer to allow East Coast Yachts to better integrate its supply chain and get more control over engine features. After investigating several possible companies, Larissa feels that the purchase of Ragan Engines, Inc., is a possibility. She has asked Dan Ervin to analyze Ragan's value. Ragan Engines, Inc., was founded nine years ago by a brother and sister—Carrington and Genevieve Ragan—and has remained a privately owned company. The company manufactures marine engines for a variety of applications. Ragan has experienced rapid growth because of a proprietary technology that increases the fuel efficiency of its engines with very little sacrifice in performance. The company is equally owned by Carrington and Genevieve. The original agreement between the siblings gave each 50,000 shares of stock. Larissa has asked Dan to determine a value per share of Ragan stock. To accomplish this, Dan has gathered the following information about some of Ragan's competitors that are publicly traded: EPS DPS Stock Price ROE R Blue Ribband Motors Corp. $ .81 $ .20 $14.18 10.00% 10.00% Bon Voyage Marine, Inc. 1.38 .62 11.87 13.00 13.00 Nautilus Marine Engines -.46 .38 13.21 14.00 12.00 Industry average $ .58 $ .404 $13.09 12.33% 11.67% Nautilus Marine Engines's negative earnings per share (EPS) were the result of an accounting write-off last year. Without the write-off, EPS for the company would have been $1.60. Last year, Ragan had an EPS of $4.54 and paid a dividend to Carrington and Genevieve of $60,000 each. The company also had a return on equity of 18 percent. Larissa tells Dan that a required return for Ragan of 18 percent is appropriate. 1. Assuming the company continues its current growth rate, what is the value per share of the company's stock? 2. Dan has examined both the company's financial statements and those of its competitors. Although Ragan currently has a technological advantage, Dan's research indicates that Ragan's competitors are investigating other methods to improve efficiency. Given this, Dan believes that Ragan's technological advantage will last only for the next five years. After that period, the company's growth will likely slow to the industry average. Additionally, Dan believes that the required return the company uses is too high. He believes the industry average required return is more appropriate. Under Dan's assumptions, what is the estimated stock price? 3. What is the industry average price-earnings ratio? What is Ragan's price-earnings ratio? Comment on any differences and explain why they may exist. 4. Assume the company's growth rate declines to the industry average after five years. What percentage of the stock's value is attributable to growth opportunities? 5. Assume the company's growth rate slows to the industry average in five years. What future return on equity does this imply? 6. Carrington and Genevieve are not sure if they should sell the company. If they do not sell the company outright to East Coast Yachts, they would like to try and increase the value of the company's stock. In this case, they want to retain control of the company and do not want to sell stock to outside investors. They also feel that the company's debt is at a manageable level and do not want to borrow more money. What steps can they take to try to increase the price of the stock? Are there any conditions under which this strategy would not increase the stock price?
Akash M.
Problem 11-24 (Algo) Return on Investment (ROI) Analysis [LO11-1] The contribution format income statement for Huerra Company for last year is given below: Total Unit Sales $ 1,010,000 $ 50.50 Variable expenses 606,000 30.30 Contribution margin 404,000 20.20 Fixed expenses 322,000 16.10 Net operating income 82,000 4.10 Income taxes @ 40% 32,800 1.64 Net income $ 49,200 $ 2.46 The company had average operating assets of $493,000 during the year. Required: 1. Compute the company's margin, turnover, and return on investment (ROI) for the period. For each of the following questions, indicate whether the margin and turnover will increase, decrease, or remain unchanged as a result of the events described, and then compute the new ROI figure. Consider each question separately, starting in each case from the data used to compute the original ROI in (1) above. 2. Using Lean Production, the company is able to reduce the average level of inventory by $98,000. 3. The company achieves a cost savings of $7,000 per year by using less costly materials. 4. The company purchases machinery and equipment that increases average operating assets by $122,000. Sales remain unchanged. The new, more efficient equipment reduces production costs by $7,000 per year. 5. As a result of a more intense effort by sales people, sales are increased by 25%; operating assets remain unchanged. 6. At the beginning of the year, obsolete inventory carried on the books at a cost of $15,000 is scrapped and written off as a loss, thereby lowering net operating income. 7. At the beginning of the year, the company uses $178,000 of cash (received on accounts receivable) to repurchase some of its common stock.
Freshwater Bhd is a company that manufactures water filters. On 1 January 2017, the company purchased a specialized machine for the production of environmentally friendly water filters. The machine has a 10-year useful life. The following is the cost of purchasing the machine: RM Invoice price 1,500,000 General administrative cost 4,000 Handling cost 15,500 Testing cost 26,000 Installation cost 38,000 Import duties 10,000 The supplier has agreed to provide a trade discount of 2.5% off the invoice price. The company's policy is to use the cost model for subsequent measurement of the machine. On 1 January 2019, the company spent RM500,000 to replace the machine part with a new one. The company also spent RM5,000 on dismantling services for the original part. Since then, the company has had to spend RM2,000 per year on a special lubricant for the new part. On that date, the carrying value of the original part was RM250,000. With the replacement, the useful life of the machine is extended to ten years, and it is also expected that the production capacity would increase by 10%. On 31 December 2020, an impairment test was carried out on the machine. As a result, the estimated value-in-use and the fair value less cost-to-sell of the machine were RM1,000,000 and RM1,100,000, respectively. On 1 June 2021, the machine had some technical problems, and the company spent RM20,000 on repair costs to ensure the machine could operate as usual. The machine was then sold for RM1,000,000 on 30 June 2021. Required: Discuss whether the specialized machine meets the recognition criteria of property, plant, and equipment under MFRS 116 Property, Plant, and Equipment. (3 marks) Discuss and calculate the initial measurement of the machine. (7 marks) Discuss the accounting treatment for the part replacement on 1 January 2019 and calculate the new carrying value of the machine on that date. (6 marks) Discuss the accounting treatment for the impairment test of the machine on 31 December 2020. (5 marks) Calculate the gain or loss on disposal of the machine on 30 June 2021. Prepare a journal entry to record the disposal. (4 marks) (Total: 25 marks)
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