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 à · PBIT)? (FIB)95256604000(2 marks)Q2. Hutt Co. has a debt of $200m with equity of $400m. The new investors are confused on 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)Q3. 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)Q4. 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 $000Equity Reserves 10,000 Ordinary Shares 4,200 14,200Non-current liabilities Bank loans 5,100 Bonds 3,500 Preference shares 6,000 14,600Current Liabilities Overdraft 2,000 Payables 3,200 5,20034,000-2032014541500(2 marks)Q5. Which of the following ratios relate to either Financial Risk or Business Risk? (HA)(Debt/Equity) Ãâ€" 100 FINANCIAL BUSINESS(PBIT/Interest) FINANCIAL BUSINESS(Fixed Cost/Variable Cost) FINANCIAL BUSINESS(2 marks)Q6. At 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)Q7. 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? (MCQ)63%68%79%85%(2 marks)Q8. 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. This would probably have the following impact: (HA)Dividend Yield INCREASE UN-EFFECTED DECREASEPrice/ Earnings ratio INCREASE UN-EFFECTED DECREASE (2 marks)Q9. Warden Co. has a current share price of $8.5/share which was previously $4.7/share. The company paid a dividend of $2.6/share. What return would the shareholders likely to be given on their investment? (FIB)400055461000(2 marks)Q10. Which of the following statement relates to the ratios given below? (P&D)It provides a basic measure of the 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 RETURN OF SHAREHOLDERS PRICE/EARNINGS RATIO EARNINGS PER SHARE(2 marks)GEARING AND CAPITAL STRUCTURE (ANSWERS)Q1. 1.38Cost of sales = 3,000 Ãâ€" 50% = 1,500Expenses = 2,500 Ãâ€" 15% = 375Total variable cost = 1,875Contribution = 15,000 – 1,875 = 13,125Operational Gearing = 13,125 à · 9,500 = 1.38 Q2. DGearing = [200 à · (400+200)] Ãâ€" 100 = 33.33%Ungeared (0%), Normal Geared (=50%), Highly Geared (>50%) & Low Geared (