SECTION A – ANSWER QUESTION ONE (COMPULSORY QUESTION)

Question 1

The summarised annual financial statements for PGK Plc are given below for the
year to 31 January 2015, and three years later for the year to 31 January 2018. The
financial statements show that Return on Capital Employed stood at 13% in 2015
and 10% in 2018. By analysing the drivers of earnings based on the financial
statement data provided, you should explain why profitability has declined and the
key drivers which have caused this. The average tax rate for both years on financing
activities is 30%.
PGK Plc
(£000) (£000)
STATEMENT OF FINANCIAL POSITION 2018 2015

Assets
Cash and Short Term Investments 9,457 9,818
Receivables 37,912 24,268
Total Inventories 19,085 17,444
Other Current Assets 651 762
Current Assets – Total 67,105 52,292
Property Plant and Equipment – Gross 93,625 83,089
Accumulated Depreciation 59,845 52,457
Property Plant and Equipment – Net 33,780 30,632
Intangible Assets 9,585 9,095
Total Assets 110,470 92,019

Liabilities & Shareholders' Equity

Accounts Payable 19,021 14,660
Short Term Debt and Current Portion of Long 903 998
Term Debt
Accrued Payroll 1,673 2,930
Income Taxes Payable 100 528
Other Current Liabilities 2,852 1,892
Current Liabilities – Total 24,549 21,008
Long Term Debt 15,935 9,460
Provisions and Other Liabilities 21,699 19,228
Shareholders’ Equity 48,287 42,323
Total Liabilities & Shareholders' Equity 110,470 92.019
 (£000) (£000)
STATEMENT OF PROFIT AND LOSS 2018 2015

Net Sales 101,993 92,527

Less: Cost of Goods Sold 66,284 66,793
Less: Depreciation and Amortization 8,517 5,172
Gross Income 27,192 20,562
Less: Selling, General & Administrative 11,667 12,727
Expenses
Operating Income 15,525 7,835
Add: Interest Income 190 159
Earnings before Interest and Taxation (EBIT) 15,715 7,994
Less: Interest Expense 8,752 457
Pretax Income 6,963 7,537
Less: Income Taxes 1,975 2,164
Net Income 4,988 5,373

2018 2015
Return on Capital Employed 10% 13%

Total for Section A: 40 marks

SECTION B - ANSWER TWO QUESTIONS.

Question 2: Answer all parts

In June 2014, a UK listed company announced that it would buy back as much as
30% of its shares, with the repurchase being financed by new borrowings.

a. In respect of the above case discuss what is the likely effect the
repurchase will have on earnings per share and earnings per share
growth. (20 marks)
b. Will the repurchase add value to shareholders, and why? (10 marks)
(Total question 2: 30 marks)

Question 3
The following information has been provided in £millions for Zena Plc:

2018 2019 2020 2021 2022 2023

Eps 1.56 1.68 1.74 1.80 1.92
Dps 0.61 0.64 0.78 0.94 0.97
Bps 5.06 6.01 7.05 8.01 8.87 9.82

ROCE
RE

The required rate of return is 10%.

The Residual Earnings are expected to be constant after 2023

Required:

Calculate ROCE and the Value Per Share for Zena Plc.

(Total question 3: 30 marks)

Question 4: Answer all parts
a) The following provides both accounting and market data for two firms
operating in the retail sector: Cotton plc and Wool plc

Cotton plc Wool plc

£ £
Current Assets 32,596,500 39,215,871
Current Liabilities 16,169,600 34,149,755
Total Assets 1,218,658,050 124,868,357
Retained Earnings 20,185,701 23,606,531
Earnings Before Interest and
Taxes 7,010,650 13,280,757
Market Capitalisation 9,664,250 13,271,565
Long term debt 23,299,636 5,121,355
Sales (Revenue) 62,598,300 106,410,647

Calculate the Z-score for both firms using the original Altman technique; and
based on your calculations explain whether the above firms are facing the
likelihood of financial distress and why.

(22 marks)

b) Explain the possible steps taken by a firm facing financial distress.

(8 marks)

(Total question 4: 30 marks)

Total for Section B: 60 marks