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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Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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