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At the beginning of 2004 Tony Pasto bought a restaurant called The Pasta Bowl, which served Italian and Mediterranean style food. Since then Tony has had a major efficiency drive to reduce costs. Tony does not pay himself a salary, but lives on the dividends that the company pays him twice each year. In an attempt to improve the profitability of the restaurant Tony undertook a major upgrade of the dining area of the restaurant and had it painted and installed new chairs and tables in 2006. Once the upgrade was complete and the restaurant looked like an authentic Italian Café Tony realised that the trend in restaurants was shifting toward South East Asian food as customers were getting tired of pasta and pizza. At the end of 2006 Tony was offered $70,000 to sell the restaurant. Tony has come to you for advice on whether to keep the restaurant or to sell it and invest the money elsewhere. Additional Information: *The share capital represents 10,000 shares. The shares of The Pasta Bowl are not listed on the stock exchange as it is a private company and all of the shares are owned by Tony Pasto. The offer price for the company can be used to determine an estimate of the market value of the shares in 2006 only. *Of the operating expenses, selling and administrative expenses account for the following: 2006: $517,5002005: $505,0002004: $493,000 The remainder of the operating expense is financial. The financial expense is wholly comprised of interest. *For the purpose of this assignment ignore the taxation implications of Tony's investment. REQUIRED: 1.Using the financial data provided, prepare a report to Tony Pasto which analyses the profitability, liquidity and solvency of The Pasta Bowl Pty Ltd. (maximum length 1000 words). 2.As part of your report present a recommendation based upon your analysis as to whether you believe Tony Pasto should keep or sell the restaurant (maximum length 250 words - this is additional to the 1000 words of the main body of the report). To put your recommendation in context, where appropriate you should point out limitations of the data provided and their impact upon your subsequent conclusion. 3.Calculate any ratios and perform any other appropriate data manipulation needed to provide a sound empirical basis to your report (not part of the word limit, include these as an appendix to the report). The Pasta Bowl Pty Ltd. Comparative Income Statement for the years ended 31 December 2006, 2005 and 2004. (in thousands of $'s) 200620052004 Net Sales1,052986942 Cost Of Goods Sold 410404405 Gross Profit642582537 Operating Expenses 520508495 Operating Profit before Tax1227442 Income tax expense 49 30 17 Operating Profit after Tax$ 73$ 44$ 25 The Pasta Bowl Pty Ltd. Comparative Balance Sheet as at 31 December 2006, 2005 and 2004 (in thousands of $'s) 200620052004 Assets: Cash at Bank30135136 Accounts Receivable (net)121411 Inventory282931 Prepaid Expenses865 Property, Plant and Equipment (net) 199 97 99 Total Assets$277$281$282 Liabilities: Current Liabilities536066 Non-Current Liabilities303030 Total Liabilities 83 90 96 NET ASSETS$194$191$186 Shareholders' Equity: Share Capital100100100 Retained Profits 94 91 86 $194$191$186 Restaurant Industry Averages Gross profit margin41% Operating profit before tax margin8% Owners equity64% Asset turnover3.37 Days stock on hand26

2 years ago - 3 answers