Accounting Tutorial

ANSWERS

Financial Ratio Analysis

Tutorial 13.

1. Investment Ratios – Kane & Abel Ltd

INVESTMENT | | | |

Dividend payout ratio | Dividend announced for yrX100Earnings for the yr available for dividends (NPAT) | 120*100/120100% | 70*100/13651% |

Earnings per Share | Earnings available to ordinary share holdersNumber ordinary shares issued | 120/35034c | 136/27050c |

Price/Earnings Ratio | Market value per shareEPS | 6.50/0.3419 | 8.20/0.5016 |

* Very unusual for a business to pay out all its profit in dividends, the usual scenario is to re-invest in the business buy more assets to grow the business. Retained earnings is the cheapest form of finance available to a business

* EPS – hard to compare one business with another because of differences in, size of business, capital structure, business activity, stage in business life cycle, business goals etc

* PE ratio – the confidence the market has in the business. Can’t compare businesses because of differences but analysts do look at businesses of similar size in the same industry. Trend is more important.

2. Economic Events

How could the following economic problems affect a New Zealand firm’s profitability and share price.

* Inflation

* Unemployment

* High NZ dollar

* Low interest rates

* Tight employment market

Inflation – costs of resources (raw materials, labour and overheads) increase, firm could try to pass costs on to customer but may have to absorb costs for a period of time. Some businesses may not survive.

Unemployment – if this is increasing then consumers have less to spend, less money circulating. Eg. Someone can’t pay their mortgage, what could happen?

High NZ Dollar – exports more expensive for overseas customers to buy, imports cheaper for New Zealanders to buy. Exports may have to lay off staff or shift their manufacturing overseas, what are the implications of this?

Low interest rates – cheap for businesses to borrow capital...