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QUESTION FOUR [25] The following balances/data was extracted from the accounting records of Rosie Blue Ltd...

QUESTION FOUR [25]

The following balances/data was extracted from the accounting records of Rosie Blue Ltd on 28 February 2015, the end of their financial year.

Share capital (900 000 shares originally issued at R2 each) 1 800 000

Retained income 160 000

Non Current Assets 1 750 000

Inventories 220 000

Receivables 600 000

Cash/Bank 300 000

Payables 730 000

Loans at 15% p.a. 180 000

Net profit after tax 765 000

Market price of share 270c

Dividends per share 65c

Required

4.1 Calculate and comment on the following ratios:

4.1.1 Current ratio. (last year 2.33: 1) (4)

4.1.2 Acid test ratio. (last year 1.58: 1) (4)

4.2 Calculate the PE (Price Earnings) ratio and explain what a low PE ratio might mean. (4)

4.3 Calculate the earnings per share. Will shareholders be happy with this? Why? (4)

4.4 Calculate the market to book ratio and explain the significance of this ratio. (4)

4.5 Calculate and comment on the debt equity ratio. (3)

4.6 Calculate the retained income for the year. (2)

Expert Solution

4.1.1 current ratio= current assets/current liabilities= (220000+600000+300000)/730000= 1.534

ratio is low compared to last year . A good ratio is 2. we can say not bad.

4.1.2 Acid test ratio= liquid assets/current liabilities= ( 600000+ 300000)/730000= 1.232

ratio is lesser than last year. but above 1 it is okay.

4.2 Price earning ratio= market price/EPS= eps= net profit after tax/ no of shares= 765000/900000= 0.85

= 0.270/0.85= 0.318 companies with low pe ratio are often considered to be value stocks . It means that they are undervalued because their stock price trade lower relative to its fundamentals.

4.3 EPS= net profit after tax/ no of shares= 765000/900000= 0.85 they should be happy with this as share price with low pe ratio is under valued and when price moves relative to strength they gain.

4.4 market to book ratio= stock price/book value per share= book value per share = (share capital + retained income)/ no of shares= (1800000+160000)/900000= 2.17= 0.270/2.17=0.124. The book-to-market ratio helps investors find a company's value by comparing the firm's book value to its market value. Any value under 1 is a good price to book value. Here market price is under valued compared to book and the share should outperform in future.

4.5 debt quity ratio= total debt/equity fund= 910000/1960000= 0.464 and the ratio is good upto 2 is okay. here it is not risky as ratio is low.

4.6 retained income for the year= Net profit after tax less dividend= 765000- (900000*0.65)= 180000

jeff jeffy answered 2 years ago

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