Gearing and Capital Structure

The profit & loss statement of Biro Co is given below:

Revenue 15,000

Cost of Sales (3,000)
Gross profit 12,000
Expenses (2,500)
Profit before interest & tax 9,500
Interest (2,200)
Tax (1,300)
Net Profit 6,000If 15%
Expenses & 50% Cost of sales are variable costs.

What is the operational gearing of Biro Co. nearest two decimal places using (Contribution ÷ PBIT)? (FIB)95256604000(2 marks). Hutt Co. has a debt of $200m with equity of $400m. The new investors are confused about the gearing level of Hutt Co. If the investors use debt to debt plus equity method which stage of gearing level is Hutt Co at? (MCQ)UngearedNormal GearedHighly GearedLow Geared(2 marks). What will be the effect on the financial risk of a company if the interest covers are as follows? (HA)Interest Cover is 6.5 times HIGH LOWInterest Cover is 3 times HIGH LOW(2 marks).
The ordinary shares of a company have a face value of $0.3/share & are currently traded on the market for $5/share. The bonds have a face value of $100 and currently, trade at $110. The preference shares have a face value of $1 and currently, trade at 60 cents. What is the market value based gearing of the company, defined as prior charge capital/equity using the following information giving an answer to the nearest %? (FIB)$000 $000

Equity Reserves 10,000
Ordinary Shares 4,200 14,200
Non-current liabilities
Bank loans 5,100
Bonds 3,500
Preference shares 6,000 14,600
Current Liabilities Overdraft 2,000
Payables 3,200 5,20034,000-2032014541500(2 marks).

Which of the following ratios relate to either Financial Risk or Business Risk?
FINANCIAL BUSINESS
On 15th December 2011, a marketing agency declares an interim ordinary dividend of 9.3c/share and a final ordinary dividend of 10.2c/share. Assuming an ex-div share price of 612c, what is the dividend yield? (MCQ)1.52%1.67%3.19%3.74%(2 marks). A company has $205m assets and has liabilities of $70m. Current liabilities make up 20% of the total liabilities. The company has a profit after tax of $130 and the corporation tax in the market is 25%. The company has no interest-paying loans.
What is the return on capital employed? A group of shareholders was expecting an overall bad result for dividends but when the results were announced the results were not as bad as it was expected by the shareholders.  What return would the shareholders likely to be given on their investment? (FIB)400055461000(2 marks). Which of the following statement relates to the ratios given below? It provides a basic measure of company performance. This is the basic measure of a company’s performance from an ordinary shareholder’s point of view An indication of the effect on shareholders’ wealth.
Cost of sales = 3,000 × 50% = 1,500
Expenses = 2,500 × 15% = 375.
Total variable cost = 1,875.
Contribution = 15,000 – 1,875 = 13,125
Operational Gearing = 13,125 ÷ 9,500 = 1.38.
DGearing = [200 ÷ (400+200)] × 100 = 33.33%
Ungeared (0%), Normal Geared (=50%),
Highly Geared (>50%) & Low Geared (<50%)

Q3. Interest Cover is 6.5 times HIGH Interest Cover is 3 times LOWThe interest cover ratio is a measure of financial risk which is designed to show the risks in terms of profit rather than in terms of capital values.
Q4. 18% Equity = (4,200 ÷ 0.3) × 5 = 70,000

Preference shares = (6,000 ÷ 1) × 0.6 =3,600
Bonds = (3,500 ÷ 100) × 110 = 3,850
Gearing = [(3,600 + 3,850 + 5,100) ÷ 70,000] × 100 = 18%

Q5.(Debt/Equity) × 100. CDividend yield = (9.3 + 10.2) ÷ 612 = 0.03186 0.03186 × 100 = 3.19%
Q7. DCurrent liabilities = 70 × 20% = 14

Capital employed = 205 – 14 = 191
Profit before interest & tax = 130 × 125% = 162.5
ROCE = (162.5 ÷ 191) × 100 = 85%

Q8. INCREASE – The results were better than expected would most likely increase the share price resulting in an increase in price/earnings ratio. On the other hand with the same logic dividend yield will decrease as by looking at its formula (dividend/share price), hence higher the denominator lower the ratio.
Q9. 136% Total shareholder return = [2.6 + (8.5 – 4.7)] ÷ 4.7 = 1.36= 1.36 × 100 = 136%
Q10. It provides a basic measure of company performance.

PRICE/EARNINGS RATIO
This is the basic measure of a company’s performance from an ordinary shareholder’s point of view EARNINGS PER SHARE. An indication of the effect on shareholders wealth.