Financial Analysis Report: WOF's Acquisition of Bonita Foods SL

This report analyzes the financial aspects of Wholesome Organic Foods (WOF) considering the acquisition of Bonita Foods SL. It begins with an introduction to the business venture and the rationale for the acquisition, followed by an overview of WOF's current financial position, including liquidity, profitability, efficiency, and solvency ratios. The methodology section details the use of Weighted Average Cost of Capital (WACC), Net Present Value (NPV), payback period, and Internal Rate of Return (IRR) for investment evaluation. The results are discussed, comparing different scenarios (base, best, and worst case) and their impact on the acquisition decision. The report also addresses currency risk management and discusses alternative financing options, including debt and equity financing, concluding with a recommendation on the acquisition based on the financial analysis. The report uses various financial tools and techniques to evaluate the feasibility and profitability of the acquisition, providing a comprehensive assessment of the financial implications.

Finance for International
Business

Table of Contents
INTRODUCTION...........................................................................................................................3
Background..................................................................................................................................3
Aim/ objective of report...............................................................................................................3
Current wholesome organic food financial position....................................................................3
Methodology................................................................................................................................5
Discussion of results..................................................................................................................10
Discussion of currency risk.......................................................................................................10
Discussion Alternative Financing..............................................................................................11
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Through order to develop a business worldwide, it is necessary for the company to concise
way the business ventures accessible as well as the advantages they will bring to the company
(Kengatharan and Clamenthu, 2017). The most frequent strategy to set up a business would be to
start one on its own or to buy another firm that may help you expand into new markets. To do
just that, investment evaluation methodologies are primarily used to determine the venture
legislation's financial profitability and financial position.
Background
The instance study's premise has been that Wholesome Organic Foods (WOF), in order to
continue developing and improving the firm, must embark on a large-scale growth which might
lead in diversity. Bonita Foods SL is indeed trying to expand, which would take a large amount
of finance, and it is considering selling all of its interests to the right firm. This study evaluates
the Bonita Foods joint venture initiatives involving WOF, as well as choosing whether or not to
participate inside the venture using various planning and budgeting methodologies, as well as the
total amount WOF must spend for Bonita Foods SL.
Aim/ objective of report
The primary aims and purpose of this analysis is to identify and advise WOF on not to buy
Bonita Foods SL. In addition, the total volume this should spend for the acquisition. It discusses
the influence of currency currencies on the business and offering various funding options.
Current wholesome organic food financial position
It is necessary to understand the financial status of the WOF in store to obtain another firm.
The following is a comprehensive analysis.
2020 2019
Liquidity ratio
Current assets 1787 1438
Current liability 1063 844
Inventory 216 208
Quick Assets 1571 1230
Current ratio
Current assets / current
liabilities 1.68 1.70
Quick Ratio
(Current Assets -
Inventory) / Current 1.48 1.46

Liabilities
Profitability ratio
Net Income 646 472
Gross income 2393 2028
Sales 7844 6780
Gross profit margin Gross income/ net sales 31% 30%
Net profit ratio Net income/ Net Sales 8.24% 6.96%
Efficiency Ratios
Inventory 216 208
Trade Receivables 1176 839
Cost of Sales 5451 4752
Sales 7844 6780
Inventory turnover ratio Sales / Inventory 36.31 32.60
Account receivable
turnover ratio
Sales / Accounts
Receivable 6.67 8.08
Solvency ratio
Debt 500 500
Equity 1200 1200
Debt equity ratio Debt/ Equity 0.42 0.42
Interpretation:
Ratio of liquidity
The industry average is favourable, indicating that it has adequate current assets to fulfil its
current commitments. Furthermore, the quick ratio remains favourable, indicating that the
corporation has spent less in their inventories. As just a consequence, the firm's cash situation is
healthy, and the purchase is unlikely to losses that respective company.
Ratio of profitability
Both for periods, the corporation's gross margin is about 30%, indicating that it accounts
for 30% of sales revenue. It signifies that perhaps the value of items offered is made up of the
highest number. Furthermore, the profitability ratio is low, suggesting that the organisation is
spending a lot of money. However, the tendency has risen in similar to the traditional year,

indicating an upward tendency. As a result, the company’s earnings is modest (Kolawale and
Grace, 2017).
Ratio of efficiency
The firm's cash conversion cycle is strong, indicating that it really is proficient in disposing
its stock as quickly and efficiently as possible and can efficiently fulfil the demand for items
from customers. The trade payable percentage is beneficial to both the firm, indicating that it is
productive and profitable in collecting the required sum from its creditors on a timely basis. As a
result, the possibilities of accruing bad debts are reduced. As a result, the corporation's
effectiveness ratio is important, indicating that it is capable of completing the purchase.
Ratio of solvency
The debt-to-equity ratio has decreased across both periods, at 0.42, showing that the
corporation is really not encumbered by interest or debt obligations. As a result, it should be in a
situation to borrow extra cash. The WOF's long-term financial situation is strong because it can
efficiently repay its long-term debt obligations with capital.
Nevertheless, WOF's present financial situation is strong in profitability, liquidity,
effectiveness, and stability, allowing it to buy Bonita Foods SL.
Methodology
There really are a variety of strategies and processes that are used to assess the program's
dependability and cost effectiveness throughout order to efficiently accomplish the objectives
and goals. The WACC of such company is used to calculate the discount factor. This is
accomplished by weighting each amount of finance, dividing it by the price of each supply, and
afterwards adding it all up. The interest rate is used to assess the current value of something like
the upcoming projected cash flow (Palepu and et.al., 2020). The NPV, payback period, payback,
and rate of return are all calculated when the principal amount of the working capital is
determined. This same NPV is used to determine whether or not someone business is
worthwhile. The payback method aids in determining the long it will take to recoup the capital
spent, whereas the ARR aids in computing the percentage on the revenue earned in relation to
the investment cost of the project. Following this asset investments, the firm is valued, which
assists in calculate the magnitude that the WOF would be obliged to pay in addition to buying
Bonita Foods SL.
Mkt Wholesome Foods plc £0.000 No Mkt Mkt Val

Price
per
unit
*1000 Val
£000
Weightin
g
Long-term Liabilities:
£108.6
5 7% Debentures 2025 500 5 543.25 0.1232
Shares & reserves
£1.85 £1 ordinary shares 1200 1200
2220.0
0 0.5033
£2.55 £2 Preference shares 200 100 255.00 0.0578
Profit & loss 1393 1393 0.315784
£3,293 V0 =
4411.2
5 1.0000
Cost of debt finance, kD
kD :Current Mkt Price is £107.63
DCF Period (Yr) 0 1 2 3 4
Year 2021 2022 2023 2024 2025
tC: Interest (£) 7 7 7 7
0.2
1 Tax saving 1.47 1.47 1.47 1.47
Redemption (£) 100
Mkt Price (£) 108.65
CF Total (£) 108.65 5.53 5.53 5.53 -94.47
IRR: After Tax kD 5.53%
Cost of debt finance, kD
kD :Current Mkt Price is
£108.65
Bond Yield Approximation Method
kD = I + [(P' - P0)/n]
P' + 0.6(P0 – P')
kD = 7+[(100-108.65)]/4
100+0.6(108.65-100)
After tax kD = 4.59%

Cost of preference share capital:
kPREF = D0 / P0
kPREF = 0.1 / 2.55
kPREF = 0.03921 or 3.92% 3.92%
Cost of ordinary share capital:
CAPM approach:
kE = RF + bi (RM - RF) kE
DMS(02
) PNE
kE = 0.25 + 1.7( 5.25 -0.25
) = 8.75%
WACC
Summary:
Mkt Val
Weightin
g
k
kE 0.5033 8.75% 4.40%
kP 0.0578 3.92% 0.23%
kD 0.1232 3.20% 0.39%
0.684216 wacc= 5.02%

Base Case: Bonita Foods SL
1 2 3 4 5
2022 2023 2024 2025 2026 Avg
AR
R
5yr Projection €(k) €(k) €(k) €(k) €(k)
Sales Revenue
900.0
0
1035.0
0 1190.25 1368.79
1574.
11
Variable Costs:
Labour
198.0
0 215.82 235.24 256.42
279.4
9
Other VC
297.0
0 314.82 333.71 353.73
374.9
6
Total VC
495.0
0 530.64 568.95 610.15
654.4
5
Contribution
405.0
0 504.36 621.30 758.64
919.6
6
Fixed Cost
180.0
0 189.00 198.45 208.37
218.7
9
Depreciation
121.0
0 121.00 121.00 121.00
121.0
0
Operating
Profit(PBIT)
104.0
0 194.36 301.85 429.27
579.8
7
Interest 32.00 32.00 32.00 32.00 32.00
Profit before
Tax 72.00 162.36 269.85 397.27
547.8
7
Corporation Tax 18.00 40.59 67.46 99.32
136.9
7
Profit after Tax 54.00 121.77 202.39 297.95
410.9
0
217.
40
40
%
Net CF
175.0
0 242.77 323.39 418.95
531.9
0
0.952 0.907 0.863 0.822 0.783
166.6
3 220.12 279.19 344.41
416.3
6
PV @ 7.34% €
(k)
1426.
71
NPV @ 7.34%
€(k)
326.7
1
Payback:
175.0
0 3.86

Good Trade
Deal
Net CF
201.2
5 279.19 371.89 481.79
611.6
8
191.6
3 253.13 321.07 396.07
478.8
1
PV @ 7.34% €
(k)
1640.
72
NPV @ 7.34%
€(k)
540.7
2
Poor Trade Deal
Net CF
122.5
0 169.94 226.37 293.27
372.3
3
116.6
4 154.08 195.43 241.09
291.4
5
PV @ 7.34% €
(k)
998.7
0
NPV @ 7.34%
€(k)
-
101.3
0
E(NPV)
Pr NPV
Best Trade Deal 0.30 540.72 162.22
Worst Trade
Deal 0.15 -101.30 -15.20
Base Case 0.55 326.71 179.69
E(NPV) 326.71
Year
Base
Case
Best Trade
Deal
Worst Trade
Deal
0
-
1100.0
0 -1100.00 -1100.00

1 175.00 201.25 122.50
2 242.77 279.19 169.94
3 323.39 371.89 226.37
4 418.95 481.79 293.27
5 531.90 611.68 372.33
Discussion of results
The investment evaluation technique's output is useful in making decisions about a
program's viability as well as sustainability, as well as analysing the venture from many angles.
The quality means the PBP to just be five years, however the study shows that perhaps the PBP
will be 3.86 decades. As a consequence, the initiatives become presentable to the administration.
Another key factor seems to be the NPV calculated for three distinct scenarios, all of those had
positive results and one yielded a negative result.
The baseline scenario had a likelihood of 55 percent, the best scenario had a chance of 30
percent, and the worst case had a possibility of 15%. All of these diverse situations resulted in
various consequences. The best scenario had a greater return of 540.72, while the base scenario
had a positive Net present value, indicating that these possibilities are appropriate. In one of the
worst scenario, however, the NPV produced is zero, indicating that perhaps the earnings are
inadequate to pay the upfront outlay, and so the proposal is denied. In addition, the IRR inside
the biggest trading scenario is 18 percent, while the base scenario is 13 percent and worst
scenario is 2 percent. In addition, mostly in basic scenario, which would be 40%, the ARR
remains strong and acceptable. As a result of all of the necessary investment evaluation
techniques being evaluated, it can be decided that the optimum trading relationship is really the
best, following mostly by Base case contract (Abbasi, Wang and Abbasi, 2017).
Discussion of currency risk
Since this value of the money differs from those of the native currency, there seems to be a
foreign exchange rate. Because the WOF have formed as more than just a Spanish corporation, it
really is exposed to a greater flow of international currency significant risk of market
fluctuations. To mitigate this risk, the corporation might use an advance contracts to embark on
this career commitment to conduct out the trade at a future stage by establishing the currency rate
(Taliercio and Estrada, 2020).

Discussion Alternative Financing
The corporate organisation might employ a variety of financial sources to help with the
purchase process. Analysis, it can even be concluded that now the firm should use a combination
of loan and financing decision. Debt finance is a low-cost type of capital that's also widely
available to a business. However, this will increase the firm's earnings burden in terms of paying
interest on the mortgage. In terms of equity capital, the business's cost of capital is extremely
high, but this suggests it has the capability to develop bigger returns because it is held by the
firm for a prolonged length of time. However, it will come with an interest load that must be paid
in addition to the principle amount. The corporation can also raise funds through equity
financing that involves issuing firm stock to the public. The WOF's stock price is greater,
implying that the firm may create a high yield because it'll be with the firm for a prolonged
period of time. Furthermore, the corporation can makes advantage of many of its cash flows
(Onuorah, 2019).
CONCLUSION
From the foregoing, it could be deduced that now in order to enforce a new strategy or
make a significant stake in the business, something is necessary to evaluate a variety of factors.
Furthermore, the invested capital must be well examined using different investment assessment
methodologies such as the NPV, PBP, as well as IRR, that aid in establishing the profitability
and sustainability of enterprises. Considering the aforementioned analysis, it can be concluded
that now the WOF must engage with Bonita Foods because it will help the company in many
ways. As a result, WOF is strongly advised to purchase Bonita Foods.

REFERENCES
Books and Journals
Kengatharan, L. and Clamenthu, D. P., 2017. Use of capital investment appraisal practices and
effectiveness of investment decisions: a study on listed manufacturing companies in Sri
Lanka. University of Jaffna.
Kolawale, O. A. and Grace, O. O. B., 2017. Assessment of viability appraisal practice by estate
surveyors and valuers in lagos metropolis, Nigeria. International Journal of Built
Environment and Sustainability. 4(1).
Palepu, K. G., and et.al., 2020. Business analysis and valuation: Using financial statements.
Cengage AU.
Abbasi, W. A., Wang, Z. and Abbasi, D. A., 2017. Potential sources of financing for small and
medium enterprises (SMEs) and role of government in supporting SMEs. Journal of
Small Business and Entrepreneurship Development. 5(2). pp.39-47.
Onuorah, A. C., 2019. Appraisal of Capital Budgeting Techniques and Performance of
Manufacturing Firms in Nigeria. Journal of Management Information and Decision
Sciences, 22(4), pp.462-470.
Taliercio, R. and Estrada, E. A., 2020. Best Practices in Project Appraisal and Selection. Well
Spent: How Strong Infrastructure Governance Can End Waste in Public Investment.
p.249.