<<

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( 9)



seem that generous.
The board of Safeway had originally recommended Morrison™s offer to
their shareholders, but then retracted this advice on the grounds that there
seemed to be many companies interested in acquiring their company.
Shareholders were reminded that a bidding war would likely lead to an
increased offer, although they did point out that Morrison™s bid was the
only one they had. Accordingly, their advice was that shareholders should
hold their fire to await developments.
By the end of January, Morrison had in place borrowed facilities of £1 bil-
lion, enabling it to formally bid for Safeway, which it did on 31 January by
sending out its offer to their target™s shareholders. By March 14, Morrison
had received acceptances of only about 0.7% of Safeway™s issued capital
and extended their offer deadline to 4 April, but with so many compa-
nies still threatening to bid, the takeover was referred to the Competition
Commission.
In the meantime, the Morrison bid lapsed and at the Competition Com-
mission hearing they argued that a Morrison/Safeway merger would make
them the fourth largest food retailer in the United Kingdom and would
enable the enlarged group to compete head on with Asda (Wal-Mart),
Tesco and Sainsbury, which would be in the best interests of all con-
cerned. It was now down to the Trade and Industry Secretary to make
a final decision following the recommendation made by the Competition
Commission.
At the end of September, the Trade and Industry Secretary gave the all-
clear for Morrison to bid for Safeway, provided it sold 53 Safeway stores.
Some larger competitors were prevented from bidding, but it was still
possible that a large private equity company might thwart Morrison at
the last minute by coming in with a higher bid. However, no higher bid
materialised.
In December, Morrison issued a revised bid of one new Morrison share for
every one Safeway share, plus 60 pence for every Safeway share, which
valued the target company at £3 billion. The Safeway board recommended
this revised offer and the merger was to be effected by way of a scheme
of arrangement under section 425 of the Companies Act 1985. Following


268
Case studies



acceptance of 99% of each company™s shareholders and court approval, the
merger finally went through in March 2004, with the new Morrison shares
being traded for the first time on 8 March 2004. Thus the process has
taken 14 months from the time the bid was first announced. The ˜market™
rewarded Morrison™s management by moving the company™s share price
to above 250 pence, without taking into account the difficulties that lay
ahead.
For the Morrison management team, their problems had really only just
started. In the previous four years, they had been under no financial
pressure having between £36 million and £207 million in liquid funds
at their year end, but suddenly they were £1 billion in debt and knew
that their bankers would be keeping an eagle eye on the progress they
made. In addition, they faced the usual challenges of a culture clash and
managing a workforce feeling they were the underdogs having been taken
over. There was also the possibility of Safeway™s customers in the south
of the country not wishing to be associated with a northern company.
So Morrison™s management had a Herculean task in integrating Safeway
stores into their ways, given that a significant number of Safeway staff
needed to be retrained. Each Safeway store had to be investigated and
either sold or converted and refitted to trade as Morrison™s. Synergies had
to be assessed and the appropriate cost savings made.
Naturally, given the sheer size of the task ahead, Morrison™s financial posi-
tion worsened and with the market taking a short-term view, the com-
pany™s share price went rapidly down, falling 32% to 170 pence, not
helped by the company having to admit that there would be worse to
come before things got better.
After 2 years, approximately £0.5 billion had been expensed in converting
Safeway stores, including remedial maintenance and redundancies, and
over £300 million had been capitalised for items such as refrigeration plant
and till systems. But with the conversion programme nearing completion
and the company suggesting it had turned the corner, the price of the
share drifted upwards once more.
When the company™s accounts for the year ended 31 January 2006 came
out, the figures appeared to be pretty grim. Operating profit as a percentage
of sales prior to the takeover was in the range of 5.8%“6.4%; now it was


269
Accounting and Business Valuation Methods



down to a mere 0.9% and after restructuring costs the company reported
losses after tax of £250 million. Net debt was still over £1 billion and the
company™s share price was not far away from its 170 pence low. However,
restructuring was nearly complete and management could once again get
back to the basics of running a complex business.
Those investors brave enough to support the company™s management and
their employees saw the value of their shares increase by more than 50%
in the tax year 2006/7, from 200 pence to over 300 pence. In the year ended
4 February 2007, the operating profit percentage recovered to 3.1% and
the company generated sufficient cash to reduce its net debt (excluding
cash equivalents) by £381 million.
The accounts accompanying this case study have been reproduced in the
style of UK GAAP accounts in order that one year can be compared to
the next. The accounts shown have been modified from the company™s
published accounts (currently being reported under IFRS) as follows:
• The split between ˜cost of sales™ and ˜distribution and administration™
is assumed.
• Interest payable and receivable is netted off, but shown separately
in the published accounts.
• The split between ˜trade debtors™ and ˜other debtors™ is assumed, as
is the split between ˜trade creditors™ and ˜other creditors™.
• Under IFRS, dividends are not shown in the Income Statement.
Where no dividend was shown in the published accounts, the div-
idend had been calculated by multiplying the number of shares by
the dividend per share for the year.
• The net debt shown does not include ˜cash equivalents™ (in this case,
a financial asset being interest rate swaps) of £19.1 million for 2007
and £36.4 million in 2006.

Morrison paid £3346 million for Safeway, comprising £665 million in
cash and £2681 million being the fair value of 1079 million shares issued.
For this they received assets with a fair value of £3667 million, giving rise
to negative goodwill of £321 million, or £263 million after amortisation.
Research shows that a merger fails as far as the acquiring company is
concerned where either too much has been paid for the target company or
the management team is not up to the task of integrating the companies.


270
Case studies



This case study shows that even where a good management team has
acquired at a fair price, there are bound to be short-term difficulties.
What tends to happen is that the acquirer™s share price moves upwards
immediately on completion of a merger and then falls rapidly as the reality
of what has happened sets in. When the acquirer™s share price has moved
up on the successful completion of the takeover may be the right time to
sell, but whether or not to buy it back and the timing of such purchase
is a matter of judgement for investors. A good management team having
paid a reasonable price will see its share price duly recover, while others
might not be so fortunate.




271
Accounting and Business Valuation Methods
272




Accounting Statements of Morrison (Wm) Supermarkets plc



4 Febr. 07 1 Febr. 04 2 Febr. 03 3 Febr. 02 30 April 01 30 January 00
Year ended 31 January 06 30 January 05
£™000 £™000 £™000 £™000 £™000 £™000 £™000 £™000

Turnover 12,461,500 12,114,800 12,103,700 4,944,100 4,289,900 3,918,300 3,500,400 2,970,100

Cost of sales 9,120,800 9,134,800 9,089,800 3,680,900 3,183,500 2,946,700 2,640,500 2,222,200

Gross profit 3,340,700 2,980,000 3,013,900 1,263,200 1,106,400 971,600 859,900 747,900

Distribution and Administration 2,956,000 2,873,800 2,630,800 947,200 836,500 741,800 655,600 564,800

Operating profit/(loss) before amortisation 384,700 106,200 383,100 316,000 269,900 229,800 204,300 183,100

Goodwill/amortisation/impairment/exceptional (38,500) 366,900 124,700 10,100 5,000 700 (3,900) 1,500

Operating profit/(loss) 423,200 (260,700) 258,400 305,900 264,900 229,100 208,200 181,600
Interest payable/(receivable) 54,200 52,200 65,400 (14,000) (14,900) (12,800) (9,400) (6,100)
Tax on profits 121,400 (62,600) 88,000 122,300 96,200 87,800 75,500 69,300

Earnings 247,600 (250,300) 105,000 197,600 183,600 154,100 142,100 118,400
Dividends 106,270 97,935 98,100 80,300 42,500 34,000 27,500 22,800

Retained profit/(loss) for the year 141,330 (348,235) 6,900 117,300 141,100 120,100 114,600 95,600

2,658,700 2,654,400 2,550,400 1,583,604 1,581,231 1,579,284 1,578,037 1,574,000
Number of ordinary shares (™000)
Year ended 4 Febr. 07 1 Febr. 04 2 Febr. 03 3 Febr. 02 30 April 01 30 January 00
31 January 06 30 January 05
£™000 £™000 £™000 £™000 £™000 £™000 £™000 £™000

Intangible assets 103,200
Tangible Assets + other long term assets 6,604,900 6,752,000 6,855,000 1,738,700 1,608,600 1,229,000
1,452,400 1,371,000
Fixed Assets 6,604,900 6,752,000 6,958,200 1,738,700 1,608,600 1,452,400 1,371,000 1,229,000

Stock 367,900 399,400 424,600 150,300 136,400 125,400 126,000 111,900
Trade Debtors 150,600 84,300 80,500 26,200 22,700 13,600 11,500 9,400
Other debtors/current assets 16,400 73,100 143,700 200 100 2,400
Cash at bank 231,100 135,300 93,500 315,400 225,000 188,800 86,200 129,800
Total Current Assets 766,000 692,100 742,300 491,900 384,100 328,000 223,800 253,500

Trade creditors 1,501,100 1,202,600 1,123,300 573,100 535,600 450,900 418,300 343,100
Other creditors 206,270 307,600 314,400 132,300 95,900 89,600 79,900 80,500
Bank Overdraft and Loans 253,800 296,600 274,700 108,800 59,300 74,200 49,800 133,100
Total Current Liabilities 1,961,170 1,806,800 1,712,400 814,200 690,800 614,700 548,000 556,700

Net Current Assets/(Liabilities) (1,195,170) (1,114,700) (970,100) (322,300) (306,700) (286,700) (324,200) (303,200)

Total Assets less Current Liabilities 5,409,730 5,637,300 5,988,100 1,416,400 925,800
1,301,900 1,165,700 1,046,800

Other long term liabilities (creditors) 820,400 966,000 965,500 99,000 63,000
53,600 61,300 67,500
Long term debt 768,600 1,022,700 1,016,700 0 0
0 0 0

Net Assets 3,820,730 3,648,600 4,005,900 1,317,400 862,800
1,248,300 1,104,400 979,300

Share capital 267,700 267,300 265,800 158,800 152,400
156,200 154,400 152,800
Share premium account 41,500 36,900 20,100 15,900 2,900
12,800 7,700 4,400
Other capital reserves 2,578,300 2,578,300 2,578,300
Profit and Loss Account 933,230 766,100 1,141,700 1,142,700 707,500
1,079,300 942,300 822,100
Other revenue reserves
Equity shareholders™ funds 3,820,730 3,648,600 4,005,900 1,317,400 862,800
1,248,300 1,104,400 979,300

Net (Debt)/Funds (791,300) (1,184,000) (1,197,900) 206,600 165,700 114,600 36,400 (3,300)

Notes:




Case studies
The company currently produce accounts in accordance with IFRS. This reproduction has modified their IFRS acounts to retain
UK GAAP for the purpose of being able to compare one year with the next. Certain assumptions have been made (see Script)

Reproduced by kind permission of Morrison (Wm) Supermarkets plc
273
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Solutions to discussion
questions
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Solutions to discussion questions


Chapter 1


A Hairdressing Company

Profit and Loss Account for the quarter ended June 30 2007

£ £

Sales 31,760
Cost of sales 1,430
Gross profit 30,330

Electricity 150
Wages 10,400
Lease 2,500
Telephones 164
Bank charges 100
Depreciation and amortisation 3,350 16,664
Net profit before interest 13,666

Interest 1,016
Net profit 12,650


Balance Sheet at June 30 2007

£ £

Intangible asset “ goodwill 2,850

Fixed asset “ car 30,250
Fixed asset “ fixtures and fittings 8,550
Total fixed assets 41,650

Stock 200
Debtors 17,500
Cash 469
Current assets 18,169
Less Creditors (current liability) 919 17,250
Total assets less current liabilities 58,900

Less: Bank loan 22,500
Total net assets 36,400

Share capital 6,250
Share premium account 17,500
Profit and loss account 12,650
36,400




277
Accounting and Business Valuation Methods


Chapter 2

ABKZ Retail plc

31 Dec 06
£™000

Reconciliation of operating profit to net
cash inflow from operating activities

22,160
Operating profit

Amortisation of intangible assets 6,900
Depreciation of tangible assets 20,330

(Increase)/decrease in stocks (59,080)
(Increase)/decrease in debtors (2,470)
Increase/(decrease) in creditors 18,080

Net cash inflow from operating activities 5,920

CASH FLOW STATEMENT

Net cash inflow from operating activities 5,920

Return on investment 0
Servicing of Finance 3,400
Taxation (7,220)
Capital expenditure (24,500)
Dividends paid (6,864)

Net cash inflow/(outflow) before financing (29,264)

Financing “ issue of shares 6,444
Financing “ issue/(repayment) of loans 0

Increase/(decrease) in cash (22,820)



Reconciliation of cash flow with
movements in cash

44,400
Opening cash
Closing cash 21,580

Movement in cash balances (22,820)




278
Solutions to discussion questions


Chapter 3
1. ˜Reasonable™ means what could be expected from a professional person
under the circumstances. In other words, the auditor cannot be held
responsible for missing something that was virtually impossible to find.
˜Material™ means significant. A minor error that would not have any
impact of an investment decision would not be deemed to be material.
2. Dividends that are paid against earnings in a particular year (i.e. div-
idends relate to the earnings) are not shown in the Income Statement
under IFRS. Under the matching concept, sales and costs related to those
sales must match, so profits are taken only when earned. Under IFRS,
profits are taken in the Income Statement on revaluation of investment
properties.
3. Fair Value is defined as the amount for which an asset could be
exchanged between knowledgeable, willing parties in an arm™s length
transaction.
4. The profit shown in the Profit and Loss Account under UK GAAP (before
depreciation and amortisation) would be equal to ˜cash generated from
operations™ if all transactions took place quickly and were for cash (i.e.
there was no stock, debtors and creditors). Under IFRS, this is no longer
the case as the Income Statement is charged with items such as ˜share-
based payments™; as they will never be paid they have no impact on cash.
˜Share-based payments™ is a value-based item and so IFRS merges items
that convert to cash with items that do not.
5. Inventory, receivables and payables.
6. Under UK GAAP, a deferred tax asset and a deferred tax liability would
be netted off; under IFRS they are shown separately.
7. In UK GAAP accounts, computer software would be found in ˜tangible
assets™; in IFRS accounts, the same thing would be found in ˜other intan-
gible assets™.
8. ˜Research costs™ are written off to the ˜Income Statement™ as incurred,
while ˜development costs™ are capitalised and included in the Balance
Sheet as ˜other intangible assets™. Development costs are subject to annual
review and impairment as appropriate.
9. Retirement benefit obligations under salary-related pension schemes.


279
Accounting and Business Valuation Methods

10. Investments are valued at mid-prices under UK GAAP and bid prices
under IFRS.

11. In the line showing: ˜cash generated from operations™.

12. A financial instrument where the value is known, is secure and can be
converted to cash within 3 months.

13. Both are revalued annually and included in the Balance Sheet at fair
value. However, only revaluation movements in investment property are
recognised in the Income Statement.

14. Credit risk, currency risk and interest rate risk.

15. An ˜operating lease™ is a genuine lease such as rent where the ownership
and control of the property remains with the landlord. On the other hand,
a ˜finance lease™ is one where the ownership and control of the asset
being leased effectively passes to the lessee.

16. The three sub-committees are: the Audit Committee, the Remuneration
Committee and the Nominations Committee. Each committee should
either consist solely of non-executive directors or, at the very least, be
effectively controlled by them.

17. Three per cent (3%).
18. Statutory reports: (a) Report of the Directors, (b) The Directors™ Remu-
neration Report, (c) Corporate Governance Report and (d) Independent
Auditors™ Report.

Non-statutory reports: (a) Chairman™s Statement and (b) Managing Direc-
tor™s Report or Finance Director™s Report, etc.

19. The Sarbanes-Oxley Act (2002)

20. Ordinary resolution 50%, special resolution 75%. If those voting in favour
were exactly 50% or 75%, respectively, the Chairman would use his
casting vote to get the required majority.




280
Solutions to discussion questions


Chapter 4
1. Portfolio theory.

2. To eliminate from a portfolio those investments that are likely to show a
poor long-term return.

3. Because options have an expiry date.

4. Calculate stock days and debtor days and compare with peer group.

5. Because property companies are valued at net asset value, plus a pre-
mium if property prices are rising (or a discount if they were falling).

6. (1) Being the largest quoted private equity company in the UK, they have
a large market capitalisation.
(2) There is an active market for the company™s shares.
(3) Only a small proportion of the company™s portfolio is in cash.
(4) The Manager has several years of experience and is highly regarded.

7. One or more unusual event occurs at the same time forcing the market
upwards and the trend is exacerbated by investors™ greed.

8. A profit warning where the impact has been evaluated financially, so
the maximum damage can be ascertained with a degree of confidence is
usually of little consequence. On the other hand, a profit warning that
merely states there is a problem along the lines ˜ ˜x™ will have a material
impact on profitability™ (unspecified amount) can often turn out to be
devastating.

9. Because the lower the number of shares in circulation, the higher the
earnings per share (if earnings are unchanged) and this EPS is multiplied
by the P/E ratio applicable to the company to arrive at a valuation.
10.

DCF at 11% (£)
Company G
1. 30.57
Company B
2. 3.01
Company C
3. 2.22
Company F
4. (53.58)
Company E
5. (108.36)
Company D
6. (122.29)
Company A
7. (190.27)



281
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References
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References

Accounting Standards Board (October 1996) FRS1 Cash Flow Statements.
Accounting Standards Board.
Accounting Standards Board (July 2000) Share Based Payments. Discussion
paper. Accounting Standards Board.
Accounting Standards Board (May 2005). Press Notice: ASB Issues Reporting
Standard on the Operating and Financial Review (OFR).
BVCA, EVCA and AFIC (2006). International Private Equity and Venture
Capital Valuation Guidelines. Guidelines developed by the Association
of Francaise des Investisseurs en Capital (AFIC), the British Venture
Capital Association (BVCA) and the European Private Equity and Ven-
ture Capital Association (EVCA), with valuable input and endorsement
by AIFI (Italy), APCRI (Portugal), APEA (Arab countries), ASCRI (Spain),
ATIC (Tunisia), AVCA (Africa), AVCAL (Australia), AVCO (Austria), BVA
(Belgium), BVK (Germany), CVCA (Czech Republic), DVCA (Denmark),
HKVCA (Hong Kong), HVCA (Hungary), ILPA-IVCA (Ireland), LVCA (Latvia),
NVCA (Norway), NVP (The Netherlands), PPEA (Poland), RVCA (Russia),
SAVCA (South Africa), SECA (Switzerland), SLOVKA (Slovakia). (Endorse-
ments as of 1 September 2005.)
BVCA Annual Directory 2006/2007.
Chorafas, D.N. (2006) IFRS, Fair Value and Corporate Governance. Elsevier.
Coopey, R. and Clarke, D. (1995) 3i “ Fifty Years Investing in Industry. Oxford
University Press.
Drury, C. (2004) Management and Cost Accounting (6th edition). Thomson.
Hamel, G. (2000) Leading the Revolution (1st edition). Harvard Business School
Press.
Holt, M.F. (2006). The Sarbanes-Oxley Act. Elsevier.
HM Revenue and Customs (May 2002). Notice 701/14.
HM Revenue and Customs (2006a). VAT. Guidelines.
HM Revenue and Customs (2006b). Enterprise Investment Scheme.
Howard, M. (October 2004) For What It™s Worth. Finan. Manage. (CIMA), 22“4.
Howard, M. (June 2005) Equity Investment. Finan. Manage. (CIMA), 35“6.
Lowenstein, R. (2001). Where Genius Failed “ The Rise and Fall of Long Term
Capital Management. Harper Collins.
Noble, A. (1995) Accounting Manual. School of Management for the Service
Sector, University of Surrey.
Ross, S.A., Westerfield, R.W, and Jaffe, J. (1996) Corporate Finance (4th edi-
tion). Irwin.
Sharpe, W.F. (September 1964) Capital asset prices: a theory of market equi-
librium under conditions of risk. J. Finan., 425“42.

285
References

Statman, M. (1987) How many stocks make a diversified portfolio. J. Finan.
Quant. Anal., 353“63.
www.hemscott.co.uk.
www.farepak.co.uk. Farepak Hampers “ update 21 December 2006.
www.iasb.org. Summaries of International Financial Reporting Standards.




Company Accounts (used in case studies)
HgCapital Trust plc
Morrison (Wm) Supermarkets plc
Paddy Power plc
Topps Tiles plc
UNITE Group plc.




Company accounts for (used to review IFRS
implementation and to collectively to form
Con Glomerate plc, apart from 3i plc)
Year ended in 2005 or 2006
3i plc
Alexandra plc
Barratt Developments plc
Big Yellow Group plc
Detica Group plc
Flying Brands Limited
Hardy Underwriting Group plc
Helical Bar plc
Hitachi Capital (UK) plc
Johnson Matthey plc
Keller Group plc
Lavendon Group plc
MITIE Group plc
Northern Foods plc
Pendragon plc

286
References

SCS Upholstery plc
SSL International plc
Topps Tiles plc
UNITE Group plc
William Hill plc
Wolfson Microelectronics plc




287
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Index
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Index

Accounting, 4 Capital, 29
and audit expenses, 28 Capital asset pricing model (CAPM), 79“84
basic principles of, 3“7 Capital structures, 78, 117“19
bank overdraft, 86
conventions, 4
bonds, 86
definition, 3
cumulative preference shares, 85
Accounting Standards Board (ASB), 112
debentures, 86
Accounts, 4, 6
debtor discounting/factoring, 87
Accruals, 5, 24, 29
equity “ ordinary shares, 79“84
AIM, see Alternative Investment
gearing, 87“8
Market (AIM)
hire purchase, 87
Alternative Investment Market (AIM), 77“8
loans, 86
Amanda, 7“10, 42
preference shares, 85
acquisition of her company, 195“6
venture capital (private equity), 68“71
completion meeting, 132
weighted cost of capital, 88“9
conclusion, 244
CAPM, see Capital asset pricing model (CAPM)
the deal structure, 103“11
Case study:
and financial adviser, 89“90
HgCapital Trust plc, 249“55
and financial lawyer, 67“8
Morrison (William) Supermarkets plc, 267“73
meetings, 60“1
Paddy Power plc “ ˜profits™ warning, 259“66
reconciliations, 21“4
Topps Tiles plc “ restructuring, 256“8
transactions, 13“21
UNITE Group plc, 167“71
5-year plan, 90“103
Cash, 53“60, 129“30
Amortisation, 214“15
Cash at bank, 26
ASB, see Accounting Standards Board (ASB)
Cash book, 4
Asset management:
Cash flow statement, 112“18, 155“6
current assets:
Cash test, 130
cash, 53“60
Charity, 49
debtors, 52“3
Companies Act 1985, 143, 144
stock, 51“2
Companies owning professional football
current liabilities:
clubs, 238
creditors, 60
Company performance, assessment, 209“11
fixed assets, 50“1
amortisation, 214“15
intangible assets, 50
basic checks, 218“22
Asset management ratios: benefit charge to income statement, 213
current ratio, 123 corporation tax, 216
debtor days, 124 depreciation, 213“14
quick ratio, 123 dividends to minority interests, 216“17
stock days, 124 exceptional gains, 212
Auditors™ report: pension deficit, 215
and directors, 146 revaluation gains on investment
limitations of the Independent, 144“5 properties, 212“13
and their responsibilities, 143“4 share options, 213
Contingent liabilities, 142“3
Balance sheet, 34“42, 154“5 Corporate governance, 181“2
Banks: audit committee, 183
charges, 28 board and committee membership, 183
negotiating with, 45“50 board of directors, duties of, 182“3
overdraft, 86 nominations committee, 183
and utility companies, 235“6 remuneration committee, 183
Basic checks, 218“22 Corporation tax, 216
Benefit charge to income statement, 213 Cost of sales, 27
Biotechnology and similar scientific Creditors, 60
companies, 237 Credit risk, 176
Bonds, 86 Cumulative preference shares, 85

291
Index

Currency risk, 176“7 FRS, see Financial Reporting Standard (FRS)
Current assets: FSA, see Financial Services Authority (FSA)
cash, 53“60
Gearing, 87“8
debtors, 52“3
Gearing ratio, 126
stock, 51“2
General insurances, 27
Current liabilities:
Goodwill, 26
creditors, 60
built into share, 128
Current ratio, 123
impairment, 28
Deal structure, 103“11
Debentures, 86 HgCapital Trust plc, 249“55
Debtors, 52“3, 142 High-yield approach, 203
days, 132 Hire purchase, 87
discounting/factoring, 87 Historical cost convention, 5
to equity ratio, 126
insurance, 26 IAS Regulation:
value, 7“8 article 4 of, 143
Delivery costs, 27 IFRS vs. UK GAAP, 179“81
Depreciation, 28 Income Statement, 152“3
Depreciation, 213“14 Independent Auditors™ Report, 144“5
Directors™ Remuneration Report, 185 Industry valuation benchmarks, 234
see also Report of the Directors Insurance companies, 236“7
Discounted cash flow or earnings, 227“34 Insurances, see General insurances and
Dividends, 171“2 National insurance
to minority interests, 216“17 Intangible asset, 165
Intangible assets, value of, 142
Earnings multiple, 225“6 Interest, 28
Earnings per share (EPS), 127 Interest rate risk, 177“8
EIS, see Enterprise Investment Scheme (EIS) International Financial Reporting
Enron, 128“9 Standards, 147“52
Enterprise Investment Scheme (EIS), 71“5 Investment companies, valuation
techniques, 222
EPS, see Earnings per share (EPS)
Investment property and investment property
Equity “ ordinary shares, 79“84
under development, 167“71
Exceptional gains, 212
Investment rules, 75“6
Exempt:
Investments, choice of, 196
status re VAT, 10
Investor (potential), 73
Expected return, 78
Investor ratios, 126
Expenditure on research and development, 157
dividend cover, 128
Fair value, 143, 148“9 dividend yield, 128
Fair value accounting (International Financial earnings per share (EPS), 127
Reporting Standard) (IFRS), 6 goodwill built into share, 128
Financial derivatives, 175 price/earnings (P/E) ratio, 127
credit risk, 176 return on equity, 127
currency risk, 176“7 Isoft plc, 132
interest rate risk, 177“8
leases, 178“9 Jarvis plc, 129“30
Financial planning process, 90“103 Junk bonds, 119
Financial Reporting Standard (FRS), 112
Leases, 178“9
Financial Services Authority (FSA), 143
Financial statements: Legal costs, 27
and directors, 141“2 Limited company, 39
preperation of, 141“2 Loans, 29, 86
Fixtures and fittings, 27 Long-term liabilities, 36

292
Index

Matching concept, 5 The Sarbanes-Oxley Act, 187“90
McAlpine (Alfred) plc, 140“1 Salary-related pension schemes, 172“5
Morrison (William) Supermarkets plc, 267“73 Sales, 29
Sales ledger, 4
National Enterprise Board (NEB), 70 Sales value plus VAT, 7“8
National Insurance, 28 Samples, 26
Net assets, 226 Setting up costs, 26
Net current liabilities, 36 Share-based payments, 157“75
Net fixed assets, 35 Shareholders™ power, 190
Notional interest, 31 Share options, 213
Sleeping partner, 31
Overall expected return, 78 Small- to medium-sized enterprises
(SME), 69
Paddy Power plc, 259“66 Sole trader, 37
Pam Sir, 119 Stationery, 27
Pension deficit, 215 Stock, 27, 51“2, 142
Performance ratios, 121 Stock days, 124, 131
gross profit compound growth, 122 Stock losses, 28
gross profit percentage, 121 Stock records, 4
operating profit (before extraordinary items) Structure ratios, 125
compound growth, 122 debt to equity ratio, 126
percentage, 122 gearing ratio, 126
operating profit by employee, 122 interest cover, 126
return on capital employed, 123
turnover compound growth, 121 Takeover bids, 243“4
Petty cash book, 4 Tax point, 12
Plant (or fixed asset) register, 4 Topps Tiles plc, 256“8
Portfolio theory, 198“203 Trade creditors, 29
Preference shares, 85 Trade debtors, 27
Prepayments, 5, 24, 28 Trial balance, 24“9
Price/earnings (P/E) ratio, 74, 127
Price/earnings ratio (PER) method, 203 UNITE Group plc, 167“71
Price/earnings to growth (PEG) ratio, 203
Profit and Loss Account, 29“34 Valuation techniques:
Profit warnings, 241 banks and utility companies, 235“6
deteriorating performance, 241“2 biotechnology and similar scientific
missing milestones, 242 companies, 237
Property developers, 235 companies owning professional football
Prudence concept, 5 clubs, 238
Purchase ledger, 4 discounted cash flow or earnings,
227“34
Quick ratio, 123 earnings multiple, 225“6
final review, 234“5
Real liability, 149“52 general industrial, leisure and retail
Rent, see Warehouse rent companies, 238“9
Rent (office), 27 industry valuation benchmarks, 234
Report of the Directors, 184 insurance companies, 236“7
Restructuring, 240“1 investment companies, 222
Return on equity, 127 profit warnings, 241
Revaluation gains on investment properties, deteriorating performance, 241“2
212“13 missing milestones, 242
Revenue recognition, 156“7 property developers, 235
Risk, 196“7 restructuring, 240“1
associated with taking on unique risk, 207“9 Value added tax (VAT), 10“13, 26“7, 125

293
Index

Van, 27 Wages, 28
VAT, see Value added tax (VAT) Warehouse rent, 27
VCT, see Venture capital trusts (VCT) Weighted cost of capital, 88“9
Venture capital (private equity), 68“71 Working capital, 36
Venture capital trusts (VCT), 76“7 cycle, 43“5




294

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