Business Report - Coursework Example

The 40 percent gearing level was an indication a majority of company’s stake was funded by debts and not equity. This would mean that what they owed in loans was higher than the equity raising doubts about English dairy’s ability to meet financial obligations. The stock that Gee company had anticipated would help meet the debt obligation was at the time moving too slowly and could not offset the debt repayments. Finally, it was the Acid test ratio, which stood at 0.8, lower than the expected above 1.0. This measure of liquidity showed the ability to meet debt obligations without the stock inventory stood low and enough sign to back out. 2. (a) The ratios presented by the bank contributed in providing misleading information to Gee Company. The 1.7 liquidity ratios showed that English dairy had sufficient liquidity to be able to meet any upcoming financial obligations. However, the ratio had the stock as part of the asset that could easily be turned into cash to meet the financial obligations. The sales at the time were declining and could not quickly be converted into cash, raising liquidity ratio concern. The return on assets showed the company generated 30 percent from the assets employed. This was misleading because part of the current assets composed of the stock inventory which was declining in sales. ...
This was a limitation in the above ratios in terms of giving an opinion that the company performing well at the time. This indicates that the ratios alone cannot be used in isolation to help make financial decisions. 3. (a) The value of goodwill that Gee Company was expected to pay for English Dairy can be arrived at by multiplying total shares by the value of each of the shares. The value of the goodwill was 30 pence above the value of each shares most recent price. This was recommended allow the shareholders sell their shares at a premium. Below is the calculation of English Dairy’s goodwill. 1,500,000*?1.2 = ?1,800,000 (b) The bank had indicated that on top of proceeds from the sales of their head office they would give a loan to cover the difference. Part of the loan was supposed to finance fees amounting to 4 percent of the purchase price plus ?4000 arrangement fee for the loan. The loan to be financed was supposed to be English Dairy goodwill value less proceeds from the Head office sale. Below are calculations showing the total fees to be financed as part of the extra loan. ?4000 + (?1,800,000*0.04) = ?76,000 ?1,800,000 - ?1,400,000 = ?400,000 ?76,000*100/?400,000 = 19% 4 The gearing position of a company is given by dividing the total debt by the total equity. Zee Company had ?14,000,000 equity funds and ?7,000,000 long-term loans before the takeover. After the takeover, the debt increased by ?476,000 and the shareholders value by ?1,800,000. This gave a gearing level of 50 percent before the takeover and 47.3 percent after the takeover. Therefore, the gearing ratio placed the company in a better position to meet debt obligation after the takeover, than it was the case before. See below Read More