Business Report - Coursework Example

There are several danger signs that could have raised an alarm that the English Dairy takeover was not a good deal. First, it was the growth in the chilled dairy products market, which was growing at 8 percent per annum. What the report failed to show was the specific growth for the fromage frais product. This was an assumption that the growth in the general chilled dairy products, was the same was for the fromage frais product. The second was the high gearing level that showed lack of financial health in terms of meeting immediate financial obligations.

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. Therefore, the 30 percent ratio was not a true representation of the company’s financial position. (b) The company’s financial accounts showed window dressed figures, which failed to capture the real financial situation of English Dairy Company.

The liquidity ratios, acid test, gearing and return on asset calculations were all accurate, though they failed to show the dead stock held at the distribution points. 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 calculations. ?7,000,000/?14,000,000*100 = 50% ?7,476,000/?15,800,000*100 = 47.3% 5. (a) There are three actions that Zee Company needs to do to retrieve something. First is lower further production of the products until the pilled stock is cleared and matches the market demand.

Second is considering a change from producing cream (skimmed off the milk) to skimmed milk. Finally, was seeking the legal redress hoping that the case is ruled in their favor. (b). The directors could consider lowering production to lower stock piled up at the stores and distribution points. This would make sure the demand is matched with production of the product. The second consideration would be switching production from cream to skimmed milk. This may require further investment in terms of understanding what the market needs are and responding to them.

This will return the profitability of the company on course. The final option is to seek legal redress an option that Zee Company had considered. However, this will require Zee Company to prove that the deception in the financial statement was deliberate and not misjudged market conditions. The legal system may compel the directors and auditors to pay for losses incurred through the misrepresented transaction. Reference list Machiraju, H. R. 2007. Mergers aquisitions and takeovers. New Delhi: New age International.