Question

In: Finance

Suppose your chosen company requires AUD 10 Million to finance a new project and your finance...

Suppose your chosen company requires AUD 10 Million to finance a new project and your finance managers are evaluating whether to borrow or issue new shares.

b) Identify 2 key financial ratios that will be important to shareholders.

Solutions

Expert Solution

The two key ratios which will be important to shareholders would be the price earning ratio and the earnings per share.

The earnings per share is computed as Net income divided by the number of shares outstanding and this measure is important for shareholders because the share price depends upon the earnings per share of the business. A higher number of outstanding shares reduces the earnings per share for the shareholders.

The price earnings ratio is another factor which is important for shareholders since it impacts their wealth directly. Higher the earnings per share higher will be the price commanded by the share in the market at a given P/E ratio and vice versa. So the number of shares issued by the management impacts the shareholders directly.

jeff jeffy answered 2 years ago
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