Mapambano is a publicly listed company that has experienced rapid growth in recent years through the acquisition and integration of other companies. Mapambano is interested in acquiring Jakisa, a retailing company, which is one of several companies owned and managed by the same family.
The summarised financial statements of Jakisa Co. for the year ended 30th September 2018 are:
Statement of Profit or Loss and Other Comprehensive Income for the year ended 30th September 2018
| TZS.‘000,000’ | |
| Revenue | 70,000 |
| Cost of sales | (45,000) |
| Gross profit | 25,000 |
| Operating costs | (7,000) |
| Directors’ salaries | (1,000) |
| Profit before tax | 17,000 |
| Income tax expenses | (3,000) |
| Profit for the year | 14,000 |
Statement of Financial Position as at 30th September 2018
| Assets Non-current assets | TZS.‘000,000’ | TZS.‘000,000’ |
| Property, plant and equipment | 32,400 | |
| Current assets Inventory | 7,500 | |
| Bank | 100 | 7,600 |
| Total assets | 40,000 | |
| Equity and liabilities Equity | ||
| Equity shares of TZS. 1,000 each | 1,000 | |
| Retained earnings | 18,700 | |
| 19,700 | ||
| Non-current liabilities Directors’ loan accounts (interest free) | 10,000 | |
| Current liabilities Trade payables | 7,500 | |
| Current tax payable | 2,800 | 10,300 |
| Total equity and liabilities | 40,000 |
From the above financial statements, Mapambano Plc has calculated for Jakisa Co. the ratios below for the year ended 30th September 2018. It has also obtained the equivalent ratios for the Retail Sector Average which can be taken to represent Jakisa’s sector.
Return on Equity (ROE)
Jakisa Co. Sector average
(including directors’ loan accounts) 47.1% 22.0%
Net asset turnover 2.36 times 1.67 times
Gross profit margin 35.7% 30.0%
Net profit margin 20.0% 12.0%
From inquiries made, Mapambano Plc has learned the following information:
(i) Jakisa Co. buys all of its trading inventory from one of the family companies at a price which is 10% less than the market price for such goods.
(ii) After the acquisition, Mapambano Plc would replace the existing board of directors and need to pay the remuneration of TZS.2.5 billion per annum.
(iii) The directors’ loan accounts would be repaid by obtaining a loan of the same amount with interest at 10% per annum.
(iv) Mapambano expects the purchase price of Jakisa to be TZS.30 billion.
REQUIRED:
(a) Recalculate the ratios for Mapambano Plc after making appropriate adjustments to the financial statements for notes (i) to (iv) above. For this purpose, the expected purchase price of TZS.30 billion should be taken as Jakisa’s equity and net assets are equal to this equity plus the loan. (Assume the changes will have no effect on taxation).
(b) In relation to the ratios calculated in (a) above, and the ratios for Jakisa Co. given in the question, comment on the performance of Jakisa Co. compared to its retail sector average.
