Question Tag: Return on Equity

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  • 15 Marks

FM – Nov 2023 – L1 – SC – Q7 – Corporate Governance and Financial Strategy

Analyze FP’s dividend payout impact on stock price using forward P/E ratio, ROE, and sustainable growth rate.

Ope plc has N10m 5 percent convertible bonds in issue. The option to convert into 40 N1 ordinary shares is open only for one more year; they must be either converted in one year’s time or left as ordinary bonds until nine years’ time when they will be redeemed at par. The current share price is ₦1.60, and the annual growth rate in the share price is 15 percent per annum. The current required return on Ope’s equity is 25 percent, its business being relatively risky.

The current yield on ordinary non-convertible bonds in similar companies is 11 percent. These interest rates are expected to remain constant.

Ife plc has 100,000 warrants outstanding, each entitling the holder to subscribe for one N1 ordinary share at 90 kobo any time during the next 3 years. The current share price is 57 kobo, and the capital growth is expected to be constant at 12 percent p.a. in the future. The current price of the warrant is 10 kobo.

Required:

a. Calculate the current value of Ope’s convertibles as straight debt, i.e., ignoring the option to convert and the value if conversion were to take place today. Would you expect the market value of the convertible to be above or below each of these amounts and why? (5 Marks)

b. By how much should the share price of Ope Plc rise before holders would be induced to convert, on the last possible date for conversion? (4 Marks)

c. Explain why the market value of a convertible bond is likely to be affected by the dividend policy of the issuing company. (4 Marks)

d. Based on the projected capital growth for Ife Plc, would you expect holders of the warrants to exercise them before expiry? What is the minimum annual growth rate of the share price necessary to induce holders to exercise their warrants? (2 Marks)

(Total 15 Marks)

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  • 20 Marks

CR – Nov 2022 – L3 – Q2 – Presentation of Financial Statements (IAS 1)

Calculate key financial ratios and evaluate the company's performance for shareholder and lender insight.

A-Z is considering raising external finance through offering its shares for sale or obtaining a term loan from the bank. The company’s financial statements for the year ended November 30, 2021, have been subjected to financial analysis as follows:

Statement of Comprehensive Income for Year Ended November 30:

2021 (N’000) 2020 (N’000)
Profit before interest and tax 6,600 4,710
Interest expense (510) (450)
Profit before tax 6,090 4,260
Income tax expense (2,190) (1,560)
Profit after tax 3,900 2,700
Dividends paid (750) (750)
Retained profit 3,150 1,950

Statement of Financial Position as at November 30:

2021 (N’000) 2020 (N’000)
Non-current assets 19,050 16,800
Current assets:
Trade receivables 6,300 6,210
Inventories 5,130 4,620
Total current assets 11,430 10,830
Total assets 30,480 27,630
Equity and liabilities
Equity:
Share capital (ordinary shares of N1 fully paid up) 9,000 9,000
Retained earnings 11,100 7,950
Total Equity 20,100 16,950
Non-current liabilities:
10% Loan notes 2022/2023 4,500 4,500
Current liabilities:
Trade payables 3,120 3,390
Taxation 1,650 1,350
Bank overdraft 1,110 1,440
Total Equity and Liabilities 30,480 27,630

Required:
a. Compute the following ratios for the years 2020 and 2021:

  1. Return on equity
  2. Dividend cover
  3. Dividend pay-out ratio
  4. Interest cover
    (8 Marks)

b. Based on the ratios computed above, prepare a report on the performance and state of the company, assuming potential shareholders and lenders are the recipients of your report.
(12 Marks)
(Total 20 Marks)

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  • 4 Marks

CR – Nov 2020 – L3 – Q5a – Return on Equity & Return on Capital Employed

Calculate and interpret return on equity and return on capital employed for Bounce Back Ltd for two years.

Bounce Back Ltd Financial Information:

Statement of Comprehensive Income for the year ended 30 November:

2019 2018
Profit before interest and tax GH¢2,200,000 GH¢1,570,000
Interest expense (GH¢170,000) (GH¢150,000)
Profit before tax GH¢2,030,000 GH¢1,420,000
Taxation (GH¢730,000) (GH¢520,000)
Profit after tax GH¢1,300,000 GH¢900,000
Dividends paid (GH¢250,000) (GH¢250,000)
Retained profit GH¢1,050,000 GH¢650,000

Statement of Financial Position as at 30 November:

2019 2018
Non-current assets (written-down value) GH¢6,350,000 GH¢5,600,000
Current assets
Trade receivables GH¢2,100,000 GH¢2,070,000
Inventories GH¢1,710,000 GH¢1,540,000
Total current assets GH¢3,810,000 GH¢3,610,000
Creditors: amounts due within one year
Trade payables GH¢1,040,000 GH¢1,130,000
Taxation GH¢550,000 GH¢450,000
Bank overdraft GH¢370,000 GH¢480,000
Total current liabilities GH¢1,960,000 GH¢2,060,000
Net current assets GH¢1,850,000 GH¢1,550,000
Total net assets GH¢8,200,000 GH¢7,150,000
Creditors: amounts due after more than one year
10% debentures GH¢1,500,000 GH¢1,500,000
Equity
Share capital (ordinary shares of 50p fully paid up) GH¢3,000,000 GH¢3,000,000
Retained earnings GH¢3,700,000 GH¢2,650,000
Total equity GH¢6,700,000 GH¢5,650,000
Total long-term liabilities and equity GH¢8,200,000 GH¢7,150,000

Required:

  1. Calculate, for both years, the return on equity and the return on capital employed.

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  • 20 Marks

FR – Nov 2021 – L2 – Q4 -Financial Statement Analysis

Analysis of financial ratios and performance of Bebebe Ltd for 2019 and 2020.

The following are the accounts of Bebebe Ltd (Bebebe), a company that manufactures playground equipment for the year ended 30 November 2020.

Statement of Comprehensive Income for the year ended 30 November:

Required:

a) Calculate, for both years, the return on equity and the return on capital employed. (4 marks)

b) Calculate, for both years, TWO (2) investment ratios to a potential investor. (4 marks)

c) Calculate, for both years, TWO (2) ratios of interest to a potential long-term lender. (4 marks)

d) Comment on the performance of Bebebe to a potential shareholder and lender using the ratios calculated above. (5 marks)

e) Explain THREE (3) weaknesses in these ratios.

(3 marks)

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  • 20 Marks

FA – Nov 2023 – L1 – Q5 – Interpretation of financial statements (Financial Ratios)

Calculate and interpret financial performance ratios for Edumfa Ltd in comparison to a competitor.

The following summarised information is available in respect of Edumfa Ltd for the year ended 31 July 2022:

The performance ratios for a competitor company for the same period are as follows:

Description Ratio
Return On Capital Employed (ROCE) 25.2%
Asset turnover rate 1.06
Acid test ratio 0.9:1
Return on equity 31.5%
Receivables collection period 38 days

Required:

a) Calculate the performance indicators for Edumfa Ltd as shown for the comparable company. (10 marks)
b) Comment on the performance of Edumfa Ltd for the year ended 31 July 2022 using the information you calculated in (a) above. (10 marks)

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  • 15 Marks

FM – Nov 2023 – L1 – SC – Q7 – Corporate Governance and Financial Strategy

Analyze FP’s dividend payout impact on stock price using forward P/E ratio, ROE, and sustainable growth rate.

Ope plc has N10m 5 percent convertible bonds in issue. The option to convert into 40 N1 ordinary shares is open only for one more year; they must be either converted in one year’s time or left as ordinary bonds until nine years’ time when they will be redeemed at par. The current share price is ₦1.60, and the annual growth rate in the share price is 15 percent per annum. The current required return on Ope’s equity is 25 percent, its business being relatively risky.

The current yield on ordinary non-convertible bonds in similar companies is 11 percent. These interest rates are expected to remain constant.

Ife plc has 100,000 warrants outstanding, each entitling the holder to subscribe for one N1 ordinary share at 90 kobo any time during the next 3 years. The current share price is 57 kobo, and the capital growth is expected to be constant at 12 percent p.a. in the future. The current price of the warrant is 10 kobo.

Required:

a. Calculate the current value of Ope’s convertibles as straight debt, i.e., ignoring the option to convert and the value if conversion were to take place today. Would you expect the market value of the convertible to be above or below each of these amounts and why? (5 Marks)

b. By how much should the share price of Ope Plc rise before holders would be induced to convert, on the last possible date for conversion? (4 Marks)

c. Explain why the market value of a convertible bond is likely to be affected by the dividend policy of the issuing company. (4 Marks)

d. Based on the projected capital growth for Ife Plc, would you expect holders of the warrants to exercise them before expiry? What is the minimum annual growth rate of the share price necessary to induce holders to exercise their warrants? (2 Marks)

(Total 15 Marks)

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  • 20 Marks

CR – Nov 2022 – L3 – Q2 – Presentation of Financial Statements (IAS 1)

Calculate key financial ratios and evaluate the company's performance for shareholder and lender insight.

A-Z is considering raising external finance through offering its shares for sale or obtaining a term loan from the bank. The company’s financial statements for the year ended November 30, 2021, have been subjected to financial analysis as follows:

Statement of Comprehensive Income for Year Ended November 30:

2021 (N’000) 2020 (N’000)
Profit before interest and tax 6,600 4,710
Interest expense (510) (450)
Profit before tax 6,090 4,260
Income tax expense (2,190) (1,560)
Profit after tax 3,900 2,700
Dividends paid (750) (750)
Retained profit 3,150 1,950

Statement of Financial Position as at November 30:

2021 (N’000) 2020 (N’000)
Non-current assets 19,050 16,800
Current assets:
Trade receivables 6,300 6,210
Inventories 5,130 4,620
Total current assets 11,430 10,830
Total assets 30,480 27,630
Equity and liabilities
Equity:
Share capital (ordinary shares of N1 fully paid up) 9,000 9,000
Retained earnings 11,100 7,950
Total Equity 20,100 16,950
Non-current liabilities:
10% Loan notes 2022/2023 4,500 4,500
Current liabilities:
Trade payables 3,120 3,390
Taxation 1,650 1,350
Bank overdraft 1,110 1,440
Total Equity and Liabilities 30,480 27,630

Required:
a. Compute the following ratios for the years 2020 and 2021:

  1. Return on equity
  2. Dividend cover
  3. Dividend pay-out ratio
  4. Interest cover
    (8 Marks)

b. Based on the ratios computed above, prepare a report on the performance and state of the company, assuming potential shareholders and lenders are the recipients of your report.
(12 Marks)
(Total 20 Marks)

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  • 4 Marks

CR – Nov 2020 – L3 – Q5a – Return on Equity & Return on Capital Employed

Calculate and interpret return on equity and return on capital employed for Bounce Back Ltd for two years.

Bounce Back Ltd Financial Information:

Statement of Comprehensive Income for the year ended 30 November:

2019 2018
Profit before interest and tax GH¢2,200,000 GH¢1,570,000
Interest expense (GH¢170,000) (GH¢150,000)
Profit before tax GH¢2,030,000 GH¢1,420,000
Taxation (GH¢730,000) (GH¢520,000)
Profit after tax GH¢1,300,000 GH¢900,000
Dividends paid (GH¢250,000) (GH¢250,000)
Retained profit GH¢1,050,000 GH¢650,000

Statement of Financial Position as at 30 November:

2019 2018
Non-current assets (written-down value) GH¢6,350,000 GH¢5,600,000
Current assets
Trade receivables GH¢2,100,000 GH¢2,070,000
Inventories GH¢1,710,000 GH¢1,540,000
Total current assets GH¢3,810,000 GH¢3,610,000
Creditors: amounts due within one year
Trade payables GH¢1,040,000 GH¢1,130,000
Taxation GH¢550,000 GH¢450,000
Bank overdraft GH¢370,000 GH¢480,000
Total current liabilities GH¢1,960,000 GH¢2,060,000
Net current assets GH¢1,850,000 GH¢1,550,000
Total net assets GH¢8,200,000 GH¢7,150,000
Creditors: amounts due after more than one year
10% debentures GH¢1,500,000 GH¢1,500,000
Equity
Share capital (ordinary shares of 50p fully paid up) GH¢3,000,000 GH¢3,000,000
Retained earnings GH¢3,700,000 GH¢2,650,000
Total equity GH¢6,700,000 GH¢5,650,000
Total long-term liabilities and equity GH¢8,200,000 GH¢7,150,000

Required:

  1. Calculate, for both years, the return on equity and the return on capital employed.

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  • 20 Marks

FR – Nov 2021 – L2 – Q4 -Financial Statement Analysis

Analysis of financial ratios and performance of Bebebe Ltd for 2019 and 2020.

The following are the accounts of Bebebe Ltd (Bebebe), a company that manufactures playground equipment for the year ended 30 November 2020.

Statement of Comprehensive Income for the year ended 30 November:

Required:

a) Calculate, for both years, the return on equity and the return on capital employed. (4 marks)

b) Calculate, for both years, TWO (2) investment ratios to a potential investor. (4 marks)

c) Calculate, for both years, TWO (2) ratios of interest to a potential long-term lender. (4 marks)

d) Comment on the performance of Bebebe to a potential shareholder and lender using the ratios calculated above. (5 marks)

e) Explain THREE (3) weaknesses in these ratios.

(3 marks)

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  • 20 Marks

FA – Nov 2023 – L1 – Q5 – Interpretation of financial statements (Financial Ratios)

Calculate and interpret financial performance ratios for Edumfa Ltd in comparison to a competitor.

The following summarised information is available in respect of Edumfa Ltd for the year ended 31 July 2022:

The performance ratios for a competitor company for the same period are as follows:

Description Ratio
Return On Capital Employed (ROCE) 25.2%
Asset turnover rate 1.06
Acid test ratio 0.9:1
Return on equity 31.5%
Receivables collection period 38 days

Required:

a) Calculate the performance indicators for Edumfa Ltd as shown for the comparable company. (10 marks)
b) Comment on the performance of Edumfa Ltd for the year ended 31 July 2022 using the information you calculated in (a) above. (10 marks)

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