Page 29 - MCS August Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

Financial position
The liquidity position of Kira appears strong, with a high current ratio of 4.2:1 for 2018 and 4.5:1
for 2017 (Montel 6.38 in 2018). Kira’ quick ratio rose very slightly to 1.5:1 from 1.4:1 in 2017
(Montel 2.2 in 2018). Both entities are similar in that they both have a significant proportion of
their current assets in the form of inventories (approximately 60%).

Kira’s receivables collection period was stable at 29 days for 2018 and 2017. Montel exercises
similar control over its receivables with a collection period of 31 days in 2018 (32 days in 2017).

Both Kira and Montel have low gearing. Kira’s non‐current liabilities increased by F$200m during
2018 (assumed to be long term borrowings), resulting in a slight increase in the gearing ratio from
4.1% to 4.2% in 2018. This compares with Montel’s gearing ratio of 4.8% in 2018 – a slight
increase from 4.6% in the previous year.

Kira reduced its payables’ payment period in 2018 to 40 days, from 45 days in 2017. Montel pays
its payables quicker with a payables’ payment period of 26 days in 2018 (24 days in 2017).

Kira has a low level of gearing of 4.2% for 2018, a slight increase from 4.1% in the previous year.
This is broadly comparable with Montel’s gearing ratio of 4.8% for 2018. Interest cover at 7.1
times in 2018 (up from 6.8 times in 2017) indicates that the level of finance costs are not a critical
factor in maintaining profitability.

There was no increase in Kira’s share capital/share premium balance from 2017 to 2018.

The Kira financial statements are consolidated statements, indicating that it is a corporate group.
There is no disclosure of non‐controlling interest, which suggests that all subsidiaries are wholly‐
owned. There was a small change in the carrying amount of goodwill from 2017 to 2018. This
could be due to an acquisition during the year, or possibly due to exchange differences on
retranslation if it has any foreign subsidiaries.

Kira’s current liabilities increased by almost 8% from 2017 to 2018, due mainly to an increase in its
income tax liability.

If Montel did acquire Kira, it would increase its market share of camera and lens manufacture and
sales. Montel would hope to benefit from synergies and economies of scale, perhaps closing
down activities in locations where both entities have a presence. In addition, Montel would gain
an entry into the scientific instruments market, which may be beneficial in terms of diversifying its
business interests. Alternatively, Montel could choose to divest itself of the scientific instruments
activities if this was not part of its long term strategy.

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