Question

15. If the interim dividend was 5c per ordinary share, the final dividend 7c per share and the market price per share on 30 June 2014 $3.20, the dividend yield is:

a. 3.75%.
b. 37.5%.
c. 26.7%.
d. 6%.

16. Per share
Carrying value on 31 December, current year $25
Quoted market value on 31 December, current year 30
Earnings per share for the current year 6
Dividend per share for the current year 3
The price–earnings ratio of the shares for the current year is:

a. 4.2 to 1.
b. 5 to 1.
c. 8.3 to 1.
d. 10 to 1.

17. Which statement concerning the current (working capital) ratio is incorrect?

a. A low current ratio may indicate difficulty in meeting short-term commitments.
b. The current ratio can be manipulated at balance date, e.g. by using cash to pay off short-term debt.
c. A high current ratio may indicate excessive investment in working capital.
d. A current ratio of $1.50 of current assets for each $1 of current liabilities should always be maintained.

18. Kaplan has a current ratio of 2.5 to 1 and current liabilities of $12 000. If Kaplan has $9000 of inventory what is the quick ratio?

a. 2.25 to 1
b. 2.00 to 1
c. 1.75 to 1
d. 1.50 to 1

19. Buyer Co has ordered goods on credit from Seller Co. Before Seller ships the goods it would like to be sure that Buyer will be able to pay for them within the normal credit period. Assuming Seller has access to Buyer's financial statements, in which of the following ratios will Seller be most interested?

a. Dividend yield ratio
b. Price earnings ratio
c. Debt ratio
d. Current ratio

20. An increase in the inventory turnover ratio is normally considered to be favourable but could be unfavourable if it means:

a. inventory is less likely to become obsolete.
b. liquidity is greater.
c. the firm not carrying enough inventory to meet its customers needs.
d. storage costs of inventory are lower.

21. Which statement relating to the debt ratio of a company is not true?

a. It can be calculated by relating liabilities to total funds.
b. It is an indicator of a company's long-term solvency.
c. It is a measure of the extent of a company's gearing.
d. A higher level of debt is normally preferable from a creditor's point of view.

Answer 1

Solution:
15)
Dividend yield Ratio = Annual Dividend/Market price per share *100
$0.12/$3.20*100
3.75
Dividend yield ratio = a)3.75%
Annual Dividend = Interim Dividend +Final Dividend
$0.05+$0.07
Annual dividend = $0.12
16)
Price Earning ratio = Market value per share/Earning per share
$30/$6
5
Price Earning ratio =b) 5 to 1
17)
Current Ratio is a ratio calculated by dividing Current Asset by Current Liability
It is a short term liquidity ratio , an ideal current ratio preferred by organisation is 2:1, meaning
that for every $1 current liability,company should have $2 of current assets to pay
its short term liabilities.
This statement is incorrect
d. A current ratio of $1.50 of current assets for each $1 of current liabilities should always be maintained.
As ratio of Current asset to current liability should be 2:1 and not 1.5:1
18)
Quick Ratio = (Current asset- Inventory)/Current Liability
($30000-$9000)/$12000
$21000/$12000
1.75
Quick Ratio = c) 1.75 to 1
Current ratio = Current assets/Current Liabilities
2.5 = Current Assets/$12000
Curent Assets = $12000*2.5
Current Assets = $30000
19)
Seller company would be interested in short term liquidity position
of the company, whether the company has enough Current assets to
pay of its current Liabilities i.e Accounts Payable.
The seller co would be interested in d)Current ratio, an ideal current
ratio would be 2:1
As goods sold on credit would result in accounts payable for buyer company
Dividend yield ratio and Price earning ratio is used by investors to make investment in company
Debt ratio is used to find long term solvency of company
Therefore seller would be interested in d) Current Ratio
20)
Inventory Turnover ratio is number of times inventory is converted into sales per period
Inventory turnover ratio = Turnover/Inventory
An higher inventory ratio is an good indicator as higher the ratio, more the invdentory are
converted into sales. i.e goods sold.
One of the reason for higher inventory ratio is lower inventory maintained by companies
If lower inventory is maintained ,then at times it would result in not fullfilling customers
order , which would decrease sales revenue. This would result in unfavourable situation
for business.
Therefore the answer is
c. the firm not carrying enough inventory to meet its customers needs.
21)
Debt ratio is expressed as Total Liabilities/Debts dividend by Total Assets
Higher the ratio , higher is the debt of an company.It shows the companies
assets which are financed by debts.Creditors would not prefer higher level of this
ratio, as it could result in difficulty in paying its debts by the company
Therefore it would show the solvency of the company
This statement is not true in case of debt ratio:
d. A higher level of debt is normally preferable from a creditor's point of view.