Accounting Ratio AL ans.pdf - BAFS – Accounting Ratios /...

BAFS – Accounting Ratios / Financial analysis HKALE - Answer
1
1. AL2008.Q1(b)
(b)
$ $
$1 ordinary share capital ($8 000 000 + $1 200 000) 9 200 000
Share premium ($1 500 000 + $1 800 000) 3 300 000
General reserve 600 000
Retained profits Balance b/d 1 280 000
Profit for the year
($3 700 000 - $2 000 000 x 6% - 200 000) 3 380 000 4 660 000
Shareholders’ equity 17 760 000
6% debentures 2 000 000
Capital employed 19 760 000
Alternative
$ $
Shareholders’ equity as at 31 December 2006 11 380 000
Issue of 1 200 000 ordinary shares at $2.50 each (1,200,000 x $2.5) 3 000 000
Profit before interest and tax 3 700 000
Interest expense ($2 000 000 x 6%) (120 000)
Tax expense (200 000)
Profit after tax 3 380 000
Shareholders’ equity as at 31 December 2007 17 760 000
Issue of $2 000 000 6% debentures at par 2 000 000
Capital employed 19 760 000
(1) Return on capital employed: Profit before interest and tax / Capital employed
$ 3 700 000 / $19 760 000 = 18.72% 2
(2) Return on equity: Profit after interest and tax / Shareholders’ equity
$3 380 000 / $17 760 000 = 19.03% 2
(3) Earnings per share : Profit after interest and tax / Number of ordinary shares
$3 380 000 / (8 000 000 + 1 200 000) = 36.74 cents 2
(6)
Reference: Part (a) Distinguish between equity capital and loan capital:
Equity capital Loan capital
- Shareholders have voting right - Debenture holders have no voting right
- Dividend is an appropriation of profit - Interest is an expense
- Dividend rate is not fixed - Interest rate is fixed
- There is no / stipulated date for repayment of capital - There is a stipulated date for redemption of
debentures
- In case of liquidation, shareholders rank the last to
receive back the fund invested
- Debenture holders rank before shareholders in case
of liquidation
(2 marks for each relevant comparison, max. 4 marks)
(4)

BAFS – Accounting Ratios / Financial analysis HKALE - Answer
2
2. AL.2009.Q4(a)(b)
(a)
(1) Gearing ratio [$5 500 000 / ($5 346 000 + $5 500 000)] 50.71%
(or 0.51)
1
(2) Earnings per share [$1 126 000 / ($2 000 000 / 5)] $2.82 1
(3) Return on equity
$1 126 000 / {[($5 346 000 - $1 126 000) + $5 346 000] /2} 23.54%
(or 0.24)
1
(4) Return on Capital employed 13.62% 1
[$1 126 000 + ($5 500 000 x 5%)] /
{[$5 346 000 - $1 126 000 + $5 500 000] + ($5 346 000 + $5 500 000) / 2 }
or 0.14
(4)
(b)
- Tai Wo Ltd is a highly geared company with half of its capital employed contributed by loan capital.