Refer to Table 4 and Table 5 and lines 82–92. Assume NH takes over EatBest in 2021 and no other factors change. Calculate the forecast:

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2020). The mark or mark type is shown in brackets.

1. Amended NH income statement year ended 31 October 2021
2. Sales revenue: 170
3. Cost of sales: 46
4. Gross profit: 124
5. Expenses: 109
6. Operating profit: 15
7. [1] (a)(i) Interest: 6.5(m)
8. [3] (a)(i) Profit before tax: $8.5m
9. [2] (a)(i) 8.5 or 8.5m
10. Amended NH statement of financial position at 31 October 2021
11. [1] (a)(ii) Non-current assets: 120 (80 + 40 as valued)
12. [1] (a)(ii) Current assets: 38.5 (CA + 10%)
13. [2] (a)(ii) Total assets: 158.5 (Max 2 marks for TA if both NCA and CA correct)
14. [1] (a)(ii) Non-current liabilities: (110) (60 + Borrowing 50)
15. [1] (a)(ii) Current liabilities: (22) (CL + 10%)
16. [2] (a)(ii) Total liabilities: (132) (Max 2 marks for TL if both NCL and CL correct)
17. [5] (a)(ii) Net assets: 26.5
18. [1] (a)(ii) Net assets = total assets – total liabilities (1 mark if no valid calculation)
19. [5] (a)(ii) Net assets = $26.5m
20. [4] (a)(ii) 26.5 or 26.5m
21. [3] (a)(ii) If candidates make the changes to CA and CL, but not NCA and NCL, = $36.5m OFR
22. Knowledge (b): Definition of shareholders
23. Knowledge (b): Definition of takeover
24. Knowledge (b): Type of integration - conglomerate
25. Knowledge (b): Identification of shareholder objectives: Expansion
26. Knowledge (b): Identification of shareholder objectives: Profit
27. Knowledge (b): Identification of shareholder objectives: Dividends
28. Knowledge (b): Identification of shareholder objectives: Shareholder value
29. Knowledge (b): Impact on other stakeholders e.g. employees, customers and local community
30. Application (b): EatBest restaurants may complement NH services
31. Application (b): NH profits have decreased
32. Application (b): Type of hotels EatBest fits best with
33. Application (b): Decrease in profit before tax from $16m to $8.5m (46.9%)
34. Application (b): Reduction in net assets from $35m to 26.5m (24.3%)
35. Application (b): Increase in NCL due to $50m borrowing
36. Application (b): Increase in total assets
37. Application (b): Change in gearing from 63% (60 / 95 × 100) to 80.6% (110 / 136.5 × 100)
38. Analysis (b): NH are borrowing to finance the takeover significantly increasing gearing which may make it difficult for further borrowing to fund other strategic investments.
39. Analysis (b): NH are also issuing shares giving EatBest shareholders a 20% stake in NH. This is a significant holding and dilutes control of current shareholders
40. Analysis (b): Profit figures are forecast to decrease in the first year so may result in a reduction in dividends
41. Analysis (b): The new business in time may develop effective synergy that may lead to cost reductions and to marketing advantages leading to future higher profits.
42. Analysis (b): The non-current assets of the restaurants may appreciate in value increasing the value of NH.
43. Analysis (b): There may be an effect on staff motivation, promotion prospects that proves beneficial for efficiency and therefore profits.
44. Evaluation (b): Borrowing $50m for a business valued at $40m therefore is NH paying too much for EatBest?
45. Evaluation (b): Initially the shareholders are paying out more for EatBest than the assets they receive are worth so why do it? Especially as profits are set to fall
46. Evaluation (b): In long term the business is bigger and may develop significant marketing and cost advantages leading to higher profits
47. Evaluation (b): Who are NH shareholders?
48. Evaluation (b): Short term decrease in profit is relatively large despite the $50m investment
49. Evaluation (b): Effect on share price short medium and long term is unknown so difficult to assess shareholders position