Gearing and Capital Structure Test Free Essays

Q1. The profit loss statement of Biro Co is given below: $000 Revenue 15,000 Cost of Sales (3,000) Gross profit 12,000 Expenses (2,500) Profit before interest tax 9,500 Interest (2,200) Tax (1,300) Net Profit 6,000 If 15% Expenses 50% Cost of sales are variable costs. What is the operational gearing of Biro Co. We will write a custom essay sample on Gearing and Capital Structure Test or any similar topic only for you Order Now nearest two decimal places using (Contribution à · PBIT)? (FIB)95256604000 (2 marks) Q2. Hutt Co. has a debt of $200m with equity of $400m. The new investors are confused on the gearing level of Hutt Co. If the investors use debt to debt plus equity method which stage of gearing level is Hutt Co at? (MCQ) Ungeared Normal Geared Highly Geared Low Geared (2 marks) Q3. What will be the effect on the financial risk of a company if the interest covers are as follows? (HA) Interest Cover is 6.5 times HIGH LOW Interest Cover is 3 times HIGH LOW (2 marks) Q4. The ordinary shares of a company have a face value of $0.3/share are currently traded on the market for $5/share. The bonds have a face value of $100 and currently, trade at $110. The preference shares have a face value of $1 and currently, trade at 60 cents. What is the market value based gearing of the company, defined as prior charge capital/equity using the following information giving an answer to the nearest %? (FIB) $000 $000 Equity Reserves 10,000 Ordinary Shares 4,200 14,200 Non-current liabilities Bank loans 5,100 Bonds 3,500 Preference shares 6,000 14,600 Current Liabilities Overdraft 2,000 Payables 3,200 5,200 34,000 -2032014541500 (2 marks) Q5. Which of the following ratios relate to either Financial Risk or Business Risk? (HA) (Debt/Equity) Ãâ€" 100 FINANCIAL BUSINESS (PBIT/Interest) FINANCIAL BUSINESS (Fixed Cost/Variable Cost) FINANCIAL BUSINESS (2 marks) Q6. At 15th December 2011, a marketing agency declares an interim ordinary dividend of 9.3c/share and a final ordinary dividend of 10.2c/share. Assuming an ex-div share price of 612c, what is the dividend yield? (MCQ) 1.52% 1.67% 3.19% 3.74% (2 marks) Q7. A company has $205m assets and has liabilities of $70m. Current liabilities make up 20% of the total liabilities. The company has a profit after tax of $130 and the corporation tax in the market is 25%. The company has no interest paying loans. What is the return on capital employed? (MCQ) 63% 68% 79% 85% (2 marks) Q8. A group of shareholders was expecting an overall bad result for dividends but when the results were announced the results were not as bad as it was expected by the shareholders. This would probably have the following impact: (HA) Dividend Yield INCREASE UN-EFFECTED DECREASE Price/ Earnings ratio INCREASE UN-EFFECTED DECREASE (2 marks) Q9. Warden Co. has a current share price of $8.5/share which was previously $4.7/share. The company paid a dividend of $2.6/share. What return would the shareholders likely to be given on their investment? (FIB) 400055461000 (2 marks) Q10. Which of the following statement relates to the ratios given below? (PD) It provides a basic measure of the company performance This is the basic measure of a company’s performance from an ordinary shareholder’s point of view An indication of the effect on shareholders wealth RETURN OF SHAREHOLDERS PRICE/EARNINGS RATIO EARNINGS PER SHARE (2 marks) GEARING AND CAPITAL STRUCTURE (ANSWERS) Q1. 1.38 Cost of sales = 3,000 Ãâ€" 50% = 1,500 Expenses = 2,500 Ãâ€" 15% = 375 Total variable cost = 1,875 Contribution = 15,000 – 1,875 = 13,125 Operational Gearing = 13,125 à · 9,500 = 1.38 Q2. D Gearing = [200 à · (400+200)] Ãâ€" 100 = 33.33% Ungeared (0%), Normal Geared (=50%), Highly Geared (50%) Low Geared (50%) Q3. Interest Cover is 6.5 times HIGH Interest Cover is 3 times LOW The interest cover ratio is a measure of financial risk which is designed to show the risks in terms of profit rather than in terms of capital values. Q4. 18% Equity = (4,200 à · 0.3) Ãâ€" 5 = 70,000 Preference shares = (6,000 à · 1) Ãâ€" 0.6 =3,600 Bonds = (3,500 à · 100) Ãâ€" 110 = 3,850 Gearing = [(3,600 + 3,850 + 5,100) à · 70,000] Ãâ€" 100 = 18% Q5. (Debt/Equity) Ãâ€" 100 FINANCIAL (PBIT/Interest) FINANCIAL (Fixed Cost/Variable Cost) BUSINESS Financial Gearing (Debt/Equity) Ãâ€" 100 Interest Cover (PBIT/Interest) Operational Gearing (Fixed Cost/Variable Cost) Q6. C Dividend yield = (9.3 + 10.2) à · 612 = 0.03186 0.03186 Ãâ€" 100 = 3.19% Q7. D Current liabilities = 70 Ãâ€" 20% = 14 Capital employed = 205 – 14 = 191 Profit before interest tax = 130 Ãâ€" 125% = 162.5 ROCE = (162.5 à · 191) Ãâ€" 100 = 85% Q8. Dividend Yield DECREASE Price/ Earnings ratio INCREASE The results were better than expected would most likely increase the share price resulting in an increase in price/earnings ratio. On the other hand with same logic dividend yield will decrease as by looking at its formula (dividend/share price), hence higher the denominator lower the ratio. Q9. 136% Total shareholder return = [2.6 + (8.5 – 4.7)] à · 4.7 = 1.36 = 1.36 Ãâ€" 100 = 136% Q10. It provides a basic measure of the company performance PRICE/EARNINGS RATIO This is the basic measure of a company’s performance from an ordinary shareholder’s point of view EARNINGS PER SHARE An indication of the effect on shareholders wealth RETURN OF SHAREHOLDERS How to cite Gearing and Capital Structure Test, Papers