- Question One 25 Marks
Some common news article headlines over the last 6 months for Forge Group Ltd include:
Forge wins Roy Hill contract 2 Sept 2013
Forge to lose $290 million 19 Sept 2013
Forge wins pile up 7 Oct 2013
Forge over the barrel 18 Nov 2013
Forge’s baptism of fire 28 Nov 2013
Lawsuits could be next chapter in Forge Story 30 Nov 2013
Forge enters trading halt 10 Jan 2014
Forge: Third time unlucky 29 Jan 2014
Forge exists ASX200 index 13 Feb 2014.
Forge group job losses at nearly 1500 after company collapse 17 Feb 2014
On 11 February 2014 Forge Group Ltd was placed in a trading halt. Forge Group Ltd was a
successful construction company with a good outlook and great management of operations.
It took over a company called CTEC in January 2012 for $16 million + $22.6 million earn-
outs. In effect, the takeover meant they bought two major contracts for the construction of
1. the Diamantina Power Station and 2. the West Angelas Power Station. It was these two
contracts that seemed to have underperformed with cost blowouts causing considerable strain
on resources. The contracts were said to be worth approximately 25% of the $1.8 billion
order book. So they were significant contracts.
Required:
1. Outline the key duties of directors. 5 marks
2. Outline the arguments for the directors of Forge Group Ltd that they carried out their
duties. 5 marks
3. Outline the arguments for shareholders, creditors and employees that the directors of
Forge Group Ltd didn’t carry out their duties. 5 marks
4. Give your opinion as to whether the directors of Forge Group Ltd carried out their duties.
2 marks
5. Journalist Paul Garvey from The Australian on 18 February, 2014 stated:
“A spokesman for Ferrier Hodgson said the group was aware of claims circulating on social
media that allegedly detail expenses incurred ahead of the group’s slip into administration
last week. Allegations suggest some senior managers cashed out their leave entitlements
earlier this year and relocated to Sydney at the company’s cost. … The Australian revealed
on Saturday that senior Forge managers had been relocated to Sydney at significant expense
in the months after Forge first revealed the power station contract issues that ultimately
proved fatal. …. News of the spending and the rumours of the annual leave payout have
angered some Forge shareholders whose holdings now appear worthless ……”
Assume Paul Garvey’s allegations are founded, compare and contrast the concepts of
utilitarianism and Kantianism using the context of the allegations to illustrate your main
arguments. 8 marks
Question Two 75 Marks
Application of Modules 3-6
1. Refer to the 30 June 2013 financial reports of Forge Group Ltd on their
web site http://www.forgegroup.com/images/files/Reports_Presentations/
Forge_Group_2013_Annual_Report.pdf Answer the following questions using the
consolidated financial report and the notes to the consolidated financial report for the year
ending 30 June 2013: (2 marks each for a total of 24 marks)
a) Does Forge Group Ltd use historical cost accounting or some other basis?
b) State the accounting equation at the beginning and end of the year and the changes
between the beginning and end of the year.
c) State the changes in the company’s equity during 2013. Speculate on why the change.
d) What is the main asset the company owns and what is its value? Compare this to the
total equity. State your conclusion from this comparison.
e) Outline the ‘other’ item that makes up comprehensive income. Why would it be
important to segregate this amount on the income statement?
f) Outline the largest expenses on the income statement. Compare them to the cash,
debtors, creditors and inventory balances. Comment on this comparison.
g) State the total revenue, net profit attributable to members of Forge Group Ltd and
EBIT.
h) Compare the net profit with the net cash flows from operating activities. Which
amount is larger? Is this normal?
i) Examine the Reconciliation of Cash Flows from Operations with the NPAT. Outline
the three major reconciliation items and state how they changed.
j) Comment on the changes discovered in the cash flow/profit reconciliation amounts
from (i) above.
k) Outline the changes that have occurred in the company’s financing activities.
l) State what investment activity Forge Group Ltd undertook during 2013. Was there a
net investment or a divestment?
2.
a) For the Forge Group Ltd for the years ending 30 June 2013 and 30 June 2011 compute and
discuss the ROE, ROA, profit margin ratio, asset turnover ratio, current ratio, cash flow ratio,
debt to equity ratio, interest coverage ratio, debt coverage ratio, NTAB, EPS, DPS and the
PER. (3 marks per ratio for a total of 39 marks)
b) Discuss the major differences between your analysis of the 30 June 2013 report and the 30
June 2011 report (prior to the takeover of CTEC). (10 marks)
