ACCA AFM · Guided practice (Show me how)
Chapter 3: Strategy Formulation
Performance review - ratios against the wealth objective
Summary financial information for Corvin plc is given below, covering performance over the last four years (money in $000; shares in thousands).
| $000 | Year 1 | Year 2 | Year 3 | Year 4 |
|---|---|---|---|---|
| Turnover | 43,800 | 48,000 | 56,400 | 59,000 |
| Cost of sales | 16,600 | 18,200 | 22,600 | 22,900 |
| Salaries and wages | 12,600 | 12,900 | 11,900 | 11,400 |
| Other costs | 5,900 | 7,400 | 12,200 | 13,400 |
| Profit before interest and tax | 8,700 | 9,500 | 9,700 | 11,300 |
| Interest | 1,200 | 1,000 | 200 | 150 |
| Tax | 2,400 | 2,800 | 3,200 | 3,600 |
| Profit after interest and tax | 5,100 | 5,700 | 6,300 | 7,550 |
| Dividends payable | 2,000 | 2,200 | 2,550 | 3,600 |
| Average debtors | 8,800 | 10,000 | 11,100 | 11,400 |
| Average creditors | 3,100 | 3,800 | 5,000 | 5,200 |
| Average total net assets | 33,900 | 35,000 | 47,500 | 50,300 |
| Shareholders' funds | 22,600 | 26,000 | 44,800 | 48,400 |
| Long term debt | 11,300 | 9,000 | 2,700 | 1,900 |
| Number of shares in issue (thousands) | 9,000 | 9,000 | 12,000 | 12,000 |
| P/E ratio (average for year): Corvin plc | 17.0 | 18.0 | 18.4 | 19.0 |
| P/E ratio (average for year): industry | 18.0 | 18.2 | 18.0 | 18.2 |
The increase in share capital was as a result of a rights issue. Review Corvin's performance in light of its objective being to maximise shareholder wealth.
Use these ratio definitions: capital employed = average total net assets; gearing = long term debt / shareholders' funds (debt to equity, book values); debtor days on turnover and creditor days on cost of sales, 365 days; share price = EPS x the company's P/E ratio.
Profitability
Calculate Corvin plc's ROCE for years 1 and 4, and its profit margin and asset turnover for year 4.
Gearing and interest cover
Calculate Corvin plc's book debt-to-equity gearing for years 1 and 4 and its interest cover for year 4.
Working capital
Calculate Corvin plc's debtor days in year 1 and creditor days in year 4.
Investor ratios and the wealth objective
Calculate Corvin plc's share price and dividend yield for year 4 and dividend per share for year 3. Evaluate whether it has met its shareholder wealth objective.
Opening this exercise…