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FR13 Analysis&InterpretFR (Practice)
FR13 Analysis&InterpretFR (Practice)
Practice Question 1
The following are the accounts of Balliol plc, a company that manufactures gardening
equipment, for the year ended 30 November 2010.
Current liabilities
Trade payables 1,040 1,130
Taxation 550 450
Bank overdraft 370 480
1,960 2,060
Non-current liabilities
10% debentures 2011 1,500 1,500
Total liabilities 3,460 3,560
The directors are considering two schemes to raise £6,000,000 in order to repay the
debentures and to finance expansion.
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Scheme 1 will involve a new issue of debentures redeemable in 15 years.
Scheme 2 will involve a rights issue of ordinary shares at £1.50 per share. The current market
price of the shares is £1.80. The share price in December 2010 was £1.75 and in December
2009 was £1.40.
Required:
(a) Calculate, for 2009 and 2010, and comment on the following ratios from a potential
lender’s (debenture holder’s) viewpoint:
(b) Calculate, for 2009 and 2010, and comment on the following ratios from a shareholder’s
viewpoint:
• Return on equity
• Earnings per share
• Dividend cover
• Debt to capital employed
(c) Explain the usefulness of the Price Earnings ratio for investors. Calculate and comment
on the Price Earnings ratio of Balliol plc at December 2009 and 2010. (The average Price
Earnings ratio for relevant competitors in 2010 was 7.5).
Practice Question 2
Discuss the impact of increasing long term debt on earnings per share, gearing ratio and
return on equity.
(Adapted: UOL 2012 ZA Q5c)
Practice Question 3
Window Ltd has seen an increase in its return on capital employed between 2011 and 2012.
Discuss possible reasons for return on capital employed increasing.
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Practice Question 4
You are given the following information in relation to company X and company Y:
Company X Company Y
Sales Gross profit
£3,250,000 £4,500,000
Gross profit margin (revenue-COGS)/revenue 10% 15%
General expenses £75,000 £425,000
Tax £225,000 £150,000
Number of shares issued at start of the period 50,000 50,000
Number of shares issued at full market price 30,000 20,000
for cash, half way through the period
Share price £50.00 £25.00
Required:
Define and calculate the earnings per share and the price earnings ratio for company X and
company Y. Discuss possible reasons for the difference in the price earnings ratio of the two
companies.
Practice Question 5
2014 2013
Gross profit percentage 20% 25%
Cost of sales £750,000 £1,200,000
Administration and distribution expenses £75,000 £300,000
Ordinary share capital £600,000 £400,000
Preference share capital £450,000 £225,000
Long term loans £150,000 £100,000
Retained earnings £900,000 £700,000
Required:
Calculate the net profit margin and the gearing ratio for 2014 and 2013. Discuss two possible
reasons for the changes seen in the net profit margin and discuss the problems associated with
increasing levels of debt within companies.
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Practice Question 6
On 1 July 2016, Hockey Ltd issued an additional 4 million ordinary shares with nominal
value of 50p for £12.50 per share. The costs of this share issue totalled 1% of the total
money raised in the share issue. After this share issue, Hockey Ltd issued bonus
shares, in respect of all its shares, on a 1 for 5 basis. Before the share issue and the
bonus issue Hockey Ltd’s share capital and reserves were as follows:
£
Ordinary share capital 5,000,000
Ordinary share premium 15,000,000
Preference share capital 4,000,000
Retained earnings 160,000,000
Required:
Show how Hockey Ltd’s share capital and reserves would be affected by the share
issues outlined above.
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