Gearing and Capital Structure: 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)

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? . 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.

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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%)

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.

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%

(Debt/Equity) × 100. CDividend yield = (9.3 + 10.2) ÷ 612 = 0.03186 0.03186 × 100 = 3.19%

DCurrent liabilities = 70 × 20% = 14

Capital employed = 205 – 14 = 191

Profit before interest & tax = 130 × 125% = 162.5

ROCE = (162.5 ÷ 191) × 100 = 85%

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.

136% Total shareholder return = [2.6 + (8.5 – 4.7)] ÷ 4.7 = 1.36= 1.36 × 100 = 136%

It provides a basic measure of company performance.

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