Ratio Analysis Questions and Answers

Question 1:
Calculate the relevant investment ratios with the following information:
Dividend per share = $0.20
Market price per share = $5.00
Annual earning = $100,000
Number of equity shares = 200,000

Answer:
(1) Dividend yield = ( Dividend per share/ Market price per share ) * 100 % = (0.2 / 5) * 100% = 4%
(2) Earnings per share (EPS) = Profit available to shareholders / Number of shares = $100,000 / 200,000 = $0.50
(3) Price earnings ratio (P/E) = Market price per share / EPS = $5 / $0.50 = 10
(4) Payout Ratio = Dividend per share / EPS = 0.2 / 0.5 = 0.4 = 40%

Question 2:
Calculate the relevant profitability ratios with the following information:
Stock at start of year: $30,000
Stock at end of year : $20,000
Annual Sales: $50,000
Annual Purchases: $10,000
Total expenses: $5,000
Capital at start: $62,000
Capital at end: $18,000

Answer:
(1) Gross profit percentage = (Gross profit / Net sales) * 100 % = (30,000 / 50,000) *100% = 60%
(2) Net profit percentage = (Net profit / Net sales) * 100 % = (25,000 / 50,000) * 100% = 50%
(3) Return on capital employed = (Profit before interest / Capital employed) * 100 % = (25,000 / 40,000) * 100% = 62.5%
Workings:
Gross profit = Sales - Cost of goods sold = 50,000 - 20,000 = $30,000
Cost of goods sold = Stock at start + Purchases - Stock at end = 30,000 + 10,000 - 20,000 = $20,000
Net profit = Gross profit - Total expenses = 30,000 - 5,000 = $25,000
Average capital employed = (Capital at start + Capital at end) / 2 = (62,000 + 18,000) / 2 = $40,000

Question 3:
Calculate the relevant liquidity ratios with the following information:
Trade Debtors: $21,000
Trade Creditors: $15,000
Proposed dividends: $2,500
Bank: $5,000
Closing stock: $9,000
Opening stock: $8,000

Answer:
(1) Current ratio = Current Assets / Current Liabilities = 35,000 / 17,500 = 2
(2) Quick ratio = (Current Assets - stock) / Current Liabilities = (35,000 - 9,000) / 17,500 = 1.49
Workings:
Current assets = closing stock + debtors + bank = 9,000 + 21,000 + 5,000 = $35,000
Current liabilities = creditors + proposed dividends = 15,000 + 2,500 = $17,500

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