The following is a summary of the final accounts of Gade Ltd for the year ended 31st December 2015.
Required:
Calculate each of the following ratios (where appropriate calculations should be shown to two decimal places):
i) Sales to capital employed. (2 marks)
View Solution
1,400,000/1,120,000 = 1.25 times
ii) Liquid (acid test) ratio. (1 mark)
View Solution
160,000/320,000 = 0.5:1
iii)Interest cover. (2 marks)
View Solution
396,000/22,000 = 18 times
iv) Dividend cover. (2 marks)
View Solution
316,000/200,000 = 1.58 times
v) Gearing ratio. (2 marks)
View Solution
(550,000/1,120,000) x 100 = 49.11%
vi) Earnings per share. (2 marks)
View Solution
316,000/450,000 = 70.22 pesewas
vii) Explain the implications of the level of gearing for the ordinary shareholders of Gade Ltd. (4 marks)
View Solution
When profits are high the ordinary shareholders will benefit from the high gearing ratio of Gade Ltd and the ordinary shareholders will show an increased earnings per share. Lower interest rates of Gade Ltd will have a minimal effect on profit and will benefit the ordinary shareholders. If the profits of Gade Ltd were to fall, then the shareholders will be disadvantaged because the interest payments and preference share dividends must be met before any ordinary dividends are paid. An increase in interest rates would also affect the return of the ordinary shareholders. Gade Ltd might have to reduce gearing by selling off any surplus assets or increasing revenue reserves as an alternative to payment of dividends.