Let's tackle each question one by one.
### 1.1. Calculate the Current Ratio for 2013 and Comment.
**Current Ratio = Current Assets / Current Liabilities**
For 2013:
- Current Assets = Inventory + Receivables + Cash
= 330,000 + 415,000 + 420,000
= 1,165,000
- Current Liabilities = Payables (given as the only current liability)
= 705,000
**Current Ratio for 2013 = 1,165,000 / 705,000 ≈ 1.65**
**Comment:**
The company’s current ratio for 2013 is 1.65:1, which means it has R1.65 in current assets for every R1 in current liabilities. Compared to the 2012 current ratio of 1:1, the company’s liquidity position has improved, indicating a better capacity to cover short-term obligations.
### 1.2. Calculate the Dividend Yield for 2013 and Explain the Meaning/Significance.
**Dividend Yield = Dividend per Share / Market Price per Share**
First, calculate **Dividends per Share**:
- Total Dividends for 2013 = 210,000
- Total Shares in 2013 = Share Capital / Par Value per Share
= 4,400,000 / 2
= 2,200,000 shares
**Dividends per Share = 210,000 / 2,200,000 ≈ 0.0955**
Next, calculate **Dividend Yield**:
- Market Price per Share = 2.60
**Dividend Yield = 0.0955 / 2.60 ≈ 3.67%**
**Explanation:**
The dividend yield of 3.67% indicates the return on investment in the form of dividends alone. Investors receive 3.67% of their purchase price back as dividends each year, providing a sense of income generated from holding the company’s shares.
### 1.3. Share Capital:
#### 1.3.1. Calculate the Number of New Shares Issued.
Total Share Capital in 2012: 4,000,000
Total Share Capital in 2013: 4,400,000
Increase in Share Capital: 4,400,000 - 4,000,000 = 400,000
Given the par value per share is R2:
**Number of New Shares Issued = Increase in Share Capital / Par Value per Share
= 400,000 / 2
= 200,000 shares**
#### 1.3.2. Calculate the Premium per Share.
Total Share Premium in 2012: 300,000
Total Share Premium in 2013: 420,000
Increase in Share Premium: 420,000 - 300,000 = 120,000
**Premium per Share = Increase in Share Premium / Number of New Shares Issued
= 120,000 / 200,000
= 0.60**
### 1.4. Calculate the Price Earnings (PE) Ratio for 2013. What Does This Ratio Mean?
**PE Ratio = Market Price per Share / Earnings per Share**
First, calculate **Earnings per Share**:
- Total Net Income after tax for 2013 = 500,000 - 150,000 = 350,000
- Total Shares = 2,200,000 shares (from earlier calculation)
**Earnings per Share = 350,000 / 2,200,000 ≈ 0.1591**
Next, calculate **PE Ratio**:
- Market Price per Share = 2.60
**PE Ratio = 2.60 / 0.1591 ≈ 16.35**
**Explanation:**
The PE ratio of 16.35 means investors are willing to pay R16.35 for every R1 of earnings the company generates. Higher PE ratios typically indicate that the market expects future earnings growth.
### 1.5. Calculate the Market to Book Ratio and State the Significance.
**Market to Book Ratio = Market Value per Share / Book Value per Share**
First, calculate **Book Value per Share**:
- Total Equity in 2013 = Share Capital + Share Premium + Retained Income
= 4,400,000 + 420,000 + 740,000
= 5,560,000
- Total Shares = 2,200,000 shares
**Book Value per Share = 5,560,000 / 2,200,000 ≈ 2.53**
Next, calculate **Market to Book Ratio**:
- Market Price per Share = 2.60
**Market to Book Ratio = 2.60 / 2.53 ≈ 1.03**
**Significance:**
The market to book ratio of 1.03 indicates that the market value of the shares is slightly above the book value, suggesting that the market perceives the company to have a value slightly exceeding its accounting value. It reflects investor sentiment regarding the company’s future profitability and asset utilization.
Super Sonic Ltd’s Balance Sheets for 2012 and 2013 financial years are below:
Assets 2012 2013
Non Current Assets 6 000 000 7 200 000
Inventory 205 000 330 000
Receivables 320 000 415 000
Cash 120 000 420 000
6 645 000 8 365 000
Equity and Liabilities
Share Capital (R2 shares) 4 000 000 4 400 000
Share Premium 300 000 420 000
Retained Income 600 000 740 000
Long term Debt 1 100 000 2 100 000
Payables 645 000 705 000
6 645 000 8 365 000
Abbreviated Income Statement for the year ended 2013:
Sales 1 200 000
Cost of sales 600 000
Depreciation 60 000
Interest expense 40 000
Net Income before Tax 500 000
Tax (30%) 150 000
Dividends 210 000
Retained Income 140 000
NB
a. Shares are currently trading at R2,60 per share.
b. The new shares were issued at the beginning of the year.
Question
1.1. Calculate the current ratio for 2013 and comment. The ratio for 2012 was 1:1. (4)
1.2. Calculate the dividend yield for 2013 and explain the meaning/significance of your answer. (5)
1.3. Share Capital:
1.3.1. Calculate the number of new shares issued. (5)
1.3.2. Calculate the premium per share. (3)
1.4. Calculate the Price Earnings (PE) ratio for 2013. What does this ratio mean? (4)
1.5. Calculate the market to book ratio and state the significance of this ratio.
1 answer