Zee Companys Business - Essay Example

? BUSINESS REPORT Business Report Question Zee co. with regard to buying English Dairy Company should consider several factors before they are motivated to buy out the company. Following the report given, it is noted that English Dairy Company was the first company to identify the market potential of the products it is currently dealing in before the encroachment of other companies and that the company enjoyed well over 50% of the market share that has since dwindled to about 20%. This down ward trend should worry Zee Co. in its attempts to take over the company since it has shown ineffectiveness in sustaining its market share. This is a subject to several guess works including poor marketing strategy, the competitors providing products of high quality than the English Dairy among others. Zee Co. should also critically analyze the provisions of the purchase as stipulated by the English Dairy company. For instance, in the analysis report given to the Zee Company, it is clearly stated that the purchase of the company could be financed by two options; sales and lease back (1.4 million pounds head office) or by the bank loan that the merchant bank consented to provide upon agreement with the Zee company. The bank proceeded by giving their terms and conditions regarding the loan as 4% of the total purchase price and an additional 4,000 pounds for the arrangement fee. These information is suppose to help Zee company to brainstorm and come up with a sound decision which is financially a plausible in their attempt to make the purchase. Question 2 a The accounting ratios that were given by the English Dairy Company could be misleading because the ratios were calculated on the assumptions that favored the financial position of the English Dairy Company. The ratios were actually misleading in the sense that English Dairy had projected that they will not be in a position to substantiate their profit margin at a time they were experiencing low sales turn out. In a bid to make up for this the company continued with their production beyond the actual market demand for their products. This was a deliberate act of deception as the company had just stocked most of their products in their satellite stores and considered them as sales for the purpose of concealing the negative sales registered by the company. The financial ratios given by the English Dairy Company could also be misleading in that the aspects of stockpile of the finished goods were not stated and if was stated then were quoted as sales. This gave a very impressive picture of the company’s performance which was fictitious. The key fundamentals involved in the calculations were hidden and this resonated by impressing Zee Company who by the time of purchase believed the report of the English Dairy Company as a honest financial position of the business. In regard of all these, Zee company was vulnerable for deception on grounds that not all the material facts were given to reflect and inform the buyer company to make choices that were sound. Question 2 b The published company’s accounts are entirely dependant on the good will of the company responsibility to report honest financial position of the business. Just because businesses clearly knows that it is the financial reports that are used to gauge the performance of the companies, they are always bound to fix figures regarding the business in order to create the feeling that the business is performing favorably. In most cases this may not be the case more so if the business is currently shopping for investors, loan or in the process of floating their shares. The financial reports of the businesses are normally corrected to suit the agenda that is moved by the company as at the time the report is required. In some other stretch, the financial reports of the companies are altered in the elaborate plan to evade tax payments. The need to relay the actual business position with regard to its finances has become an issue as business have been under legal obligation to accurately reflect their financial positions without deliberate efforts of making these figures deceptive. In pursuit of these, different countries have endeavored to create peculiar code of conducts and ethics that should govern the auditors in their duty to give the audit report of a business. Contravening these guidelines qualifies one to be liable for the penalties thereof. The deception act of the financial reports has been implicated in several losses incurred by businesses upon taking actions in reference to the reports. Question 3 a From the definition of what business goodwill is i.e. the intangible asset that can not be attributed to the existing business assets (Ittelson, 2009). One can compute the goodwill of the English Dairy company by considering its profit margin as at the time of the take over plus additional agreeable number of years considering the growth status of the business. Other factors that contribute to the profit margin like the market share and the Name of the business believed to have customer loyalty can be used to calculate the goodwill value. Since the growth of the company was reported to be about 10,000 pounds in a year, the goodwill can be compounded to quarter year and this would amount to 30,000 pounds. Question 3 b The purchase of the company was valued at 1.4 million pounds and the total fees were to be 4% of the total purchase price plus 4,000 pounds. With regard to this, it means the total percentage in pounds was 56,000 pounds this added to 4,000 pounds will amount to 60,000 pounds which actually culminates into 4.3% of the percentage of the extra fees charge don the bank loan. Question 4 Gearing ratios as used in accounting refers to the relationship between the owner’s capitals of equity to that of the borrowed funds (Ittelson, 2009). The ratio shows how the business satisfies most of it cost; by its capital or by the borrowed funds. In this regard, high gearing ratios shows that the business is not dong well since the business has to pay its debts regardless of the dismal performance it may register (Ittelson, 2009). Gearing ratio can also be considered by comparing the total assets of the company and the debts; this gives the financial position of the business and the potential risks it is nursing. For instance, the gearing ratio of Zee Company before take over was total liabilities/owner’s equity (capital) = 10,600/21,000= 0.5. After the take over the company’s new gearing ratio was 0.7. From the change in the gearing ratios above, it clearly shows that Zee Company had to contend with paying its debtors since most of it activities were funded by the money accrued from outside the business. Given the drop in the market of the products released by English Dairy Company, Zee Company may face a rough ride in the offing. Question 5 a Having committed to the purchase of the company, Zee Company will have other options closed but to explore the few remaining ones. Having known the financial position of the company and the prevailing trend of the company with regard the products produced and sales, Zee Company can explore the first option of rekindling market for the company’s products by doing SWOT analysis coupled with a market research. This move will enable Zee Company to have the sigh of relief by discharging the accumulated unsold goods. Zee will thus be obliged to undertake rigorous market research for the company’s products. Secondly, the company can also revert to the production of other products that the competing companies have initiated to shift the market demand for the English Dairy products demand. Finally, Zee can consider seeking legal redress on the same citing deception by English Dairy Company on its financial report, in this bid; Zee Company will be seeking reversal of the business transactions that had taken place between the two. Question 5 b Following the three possible grounds of salvaging the situation, the directors of Zee Company are most likely to seek legal redress on the same. This decision will be prudent in the sense that, carrying out a market research will not be of interest since Zee Company is not proficient with the new business and are most likely to be inaccurate in their analysis. In addition to this, the company will have to use unplanned expenditure in this case which its viability is unfounded. Considering production of other new products to march the competitors reign in the market will also be a toll order for the company because it comes with a number of logistics and would require a complete overhaul o the business strategies which is very demanding as far as invading the market is concerned. The only cheap and viable option to explore remains seeking legal redress. Zee Company would thus cite deception in terms of the financial report that was released to them by English Dairy as being dishonest and did not accurately reflected the ideal financial position of the business as at the time f the transaction. Reference Ittelson, T. R., 2009, Financial statements a step-by-step guide to understanding and creating financial reports, revised and expanded edition (Rev. and expanded ed.), Franklin Lakes, N.J., Career Press. Read More