GEARING RATIO (2019)= 20.85 (2018)=21.14 INTEREST COVER (2019) =1O TIMES (2018) =1O TIMES Investor ratio: EPS=...

GEARING RATIO
(2019)= 20.85
(2018)=21.14

INTEREST COVER

(2019) =1O TIMES

(2018) =1O TIMES

Investor ratio:

EPS=

(2019) = 52500290000/1=0.1810p

(2018) =36660240000/1=0.1527p

P/E=

(2019) =13.809 TIMES

(2018) =16.366 TIMES

Q1:---Based on the gearing and investor ratio you should give a constructive suggestion to the company about funding the machine using a bank loan ---

Advice Finance Manager of Greenwood Plc whether the organization is able to receive a loan or look for other options (specify clearly the available options, if any).

Expert Solution

Q1:---Based on the gearing and investor ratio you should give a constructive suggestion to the company about funding the machine using a bank loan

Ans. Based on the gearing and interest cover ratio, company should use a bank loan to fund the machine. The reason here is that company is having adequate cash flows to fund the fixed interest liabilities based on interest coverage ratio. Other reason is that company is having low gearing ratio which has decreased more in 2019. This means that company has only 20.85% debt compared to equity. So, a gearing ratio lower than 25% is typically considered low-risk by both investors and lenders. This in turn will help company to obtain bank loan easily.

Q2: Advice Finance Manager of Greenwood Plc whether the organization is able to receive a loan or look for other options (specify clearly the available options, if any).

Ans. Yes, Greenwood Plc can easily avail the bank loan as discussed above. Besides interest on bank loan gives advantage of tax deduction of interest for income tax calculation. Which in turn increases the earning available for equity shareholders. This will help company to improve EPS ratio as well as P/E ratio. So, loan option would be the most beneficial option for the company.

ekkarill92 answered 1 year ago

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