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The following figures have been extracted from the final accounts of Born2Run plc, a retailer in the sportswear industry, for the year ended 31/12/2017 - Leaving Cert Accounting - Question 5 - 2018

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Question 5

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The following figures have been extracted from the final accounts of Born2Run plc, a retailer in the sportswear industry, for the year ended 31/12/2017. The company ... show full transcript

Worked Solution & Example Answer:The following figures have been extracted from the final accounts of Born2Run plc, a retailer in the sportswear industry, for the year ended 31/12/2017 - Leaving Cert Accounting - Question 5 - 2018

Step 1

Cash purchases if the period of credit received from trade creditors is 2 months.

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Answer

To find cash purchases, use the formula:

Cash Purchases=Total Purchases−Credit Purchases\text{Cash Purchases} = \text{Total Purchases} - \text{Credit Purchases}

First, calculate the total purchases:

Total Purchases=Cost of Goods Sold+Closing Stock−Opening Stock\text{Total Purchases} = \text{Cost of Goods Sold} + \text{Closing Stock} - \text{Opening Stock}

Substituting the values:

Total Purchases=560,000+90,000−60,000=590,000\text{Total Purchases} = 560,000 + 90,000 - 60,000 = 590,000

Next, determine the credit purchases: From the creditors' payment terms for 2 months:

Credit Purchases=Total Purchases12×2=590,00012×2=98,333.33\text{Credit Purchases} = \frac{\text{Total Purchases}}{12} \times 2 = \frac{590,000}{12} \times 2 = 98,333.33

Thus,

Cash Purchases=590,000−98,333.33=491,666.67\text{Cash Purchases} = 590,000 - 98,333.33 = 491,666.67

Step 2

Dividend yield.

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Answer

To calculate the dividend yield, use the formula:

Dividend Yield=(DPSMarket Value)×100\text{Dividend Yield} = \left( \frac{\text{DPS}}{\text{Market Value}} \right) \times 100

Where:

  • DPS (Dividend per Share) = 29,000 / 350,000 = 0.0829
  • Market Value = 1.35

Thus,

Dividend Yield=(0.08291.35)×100=6.14%\text{Dividend Yield} = \left( \frac{0.0829}{1.35} \right) \times 100 = 6.14\%

Step 3

Price earnings ratio.

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Answer

The Price Earnings (P/E) ratio calculates how much investors are willing to pay per unit of earnings. The formula is:

P/E Ratio=Market ValueEarnings per Share\text{P/E Ratio} = \frac{\text{Market Value}}{\text{Earnings per Share}}

Where:

  • Earnings per Share = 29,000 / 350,000 = 0.0829
  • Market Value = 1.35

Thus,

P/E Ratio=1.350.0829=16.27\text{P/E Ratio} = \frac{1.35}{0.0829} = 16.27

Step 4

Return on capital employed.

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Answer

This ratio measures the profitability and efficiency of capital use:

Return on Capital Employed=(Net Profit+InterestCapital Employed)×100\text{Return on Capital Employed} = \left( \frac{\text{Net Profit} + \text{Interest}}{\text{Capital Employed}} \right) \times 100

Where:

  • Net Profit = 82,000
  • Interest = 18,000
  • Capital Employed = 930,000

Calculating:

Return on Capital Employed=((82,000+18,000)930,000)×100=10.75%\text{Return on Capital Employed} = \left( \frac{(82,000 + 18,000)}{930,000} \right) \times 100 = 10.75\%

Step 5

Interest cover.

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Answer

Interest cover indicates how easily a company can pay interest expenses:

Interest Cover=Net Profit+InterestInterest\text{Interest Cover} = \frac{\text{Net Profit} + \text{Interest}}{\text{Interest}}

Calculating: Where:

  • Net Profit = 82,000
  • Interest = 18,000

Thus,

Interest Cover=82,000+18,00018,000=5.56\text{Interest Cover} = \frac{82,000 + 18,000}{18,000} = 5.56

Step 6

Indicate whether the debenture holders would be satisfied with the performance, state of affairs and prospects of the company.

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Answer

The debenture holders may not be satisfied with Born2Run plc's performance based on the following:

  1. Profitability: The return on capital employed is 10.75%, which is below the prior year's return of 12.4%.
  2. Dividend Policy: The dividend cover has improved but remains below 2, indicating potential liquidity issues.
  3. Liquidity: The acid test ratio is 0.83, showing a liquidity problem.
  4. Gearing: The high debt level (53.76%) indicates increased financial risk.

These factors suggest caution regarding the company's long-term prospects.

Step 7

Born2Run plc is considering expansion. What advice would you give regarding this purchase?

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Answer

My advice is against the purchase due to the following:

  1. Credit terms: Significantly longer periods compared to industry standards indicate potential cash flow problems.
  2. Inefficient management: The increase in the period of credit from creditors signals possible issues with negotiating better terms.
  3. Stock turnover: Declining stock turnover suggests a lack of efficiency in inventory management.
  4. Overall, these points highlight the company’s operational weaknesses, making expansion risky.

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