Page 18 - CIMA SCS Workbook August 2018 - Day 1 Suggested Solutions

CIMA AUGUST 2018 – STRATEGIC CASE STUDY

The amount of revenue generated from the capital employed (asset turnover) has actually
increased, although this is mainly because of the significant fall in the value of capital employed.

The main problem is that the operating profit margin has fallen significantly. From page 10 of the
pre-seen we can see that the mix of FNG’s sales has changed over the years, with much less
revenue coming from print advertising as digital advertising revenue increases. It would appear
that this newer revenue stream has lower margins (page 9 in the pre-seen tells us that “many
advertisers have moved … online … at a lower price”). Also, as revenue from printed newspaper
sales continues to fall it may be that FNG has been cutting selling prices (and hence profit
margins) to try to slow the decline.

Return on Equity (ROE)

ROE has also fallen dramatically, so it is likely that the shareholders will be alarmed by the
performance of FNG.

EXERCISE 2

Workings

2018 2017
Gearing D / E 9,944.5/24,975.1 39.8% 15,618.5/26,954.1 57.9%
D / (D+E) 9,944.5/34,919.6 28.5% 15,618.5/42,572.6 36.7%
Interest Operating 2,921.8/1,560.5 1.9 times 8,133.3/2023.7 4.0 times
cover profit /
Finance
costs
Interest (Finance (1,560.5 / 9,944.5) 15.7% (2,023.7 / 15,618.5) 13.0%
rate costs / Year x 100% x 100%
(approx.) end long
term
borrowings
balance) x
100%
/
Interest (Finance (1,560.5 / (9,944.5 10.0% (2,023.7 (15,618.5 9.5%
rate costs / Year + 5,674.0)) x 100% + 5,674.0)) x 100%
(approx.) end total
borrowings
balance) x
100%
Dividend Profit for 1,021.0 / 3,000.0 0.3 times 4,582.2 / 4,000.0 1.1 times
cover the year /
Dividend

56 KAPLAN PUBLISHING