Chapter 1

Question 1

What is the fundamental principle of financial management?

Answer 1

• Increase Share Price / Dividend payout

- Profit Maximization and EPS Growth

Question 2

ROCE Ratio

Answer 2

PBIT/CE *100

CE = TALCL

OR Net Profit Margin X Asset Turnover

Question 3

Net Profit margin Ratio

Answer 3

Net Profit / Revenue *100

Question 4

Asset Turnover Ratio

Answer 4

Sales Revenue / CE

Question 5

Gross Profit Margin Ratio

Answer 5

Gross Profit / Sales Revenue *100

Question 6

Operating Ratio

Answer 6

Expenses / Sales Revenue *100

Question 7

Working Capital Turnover Ratio

Answer 7

Sales Revenue / Net Working capital

Question 8

Non Current Asset Turnover Ratio

Answer 8

Sales Revenue / Non - Current Assets

Question 9

What is Return on Equity and its ratio?

Answer 9

How much profit a company generates for its equity shareholders with the money they have invested in the company

ROE = Profit after tax and Preference dividends/Ordinary share capital + Reserves

*100

Question 10

What is TSR and its ratio?

Answer 10

TSR Is dividend income and capital growth

DPS + Change in Share Price / Share Price at start of period

DPS = Dividend per share

Question 11

What is Dividend Yield and its ratio?

Answer 11

Dividend Yield measures the dividend received as a percentage of the share price,

Dividend Yield = DPS /Market price per share

Question 12

Dividend Per Share

Answer 12

Total Ordinary Dividend / Total Number of shares issued

Question 13

Earnings Per Share

Answer 13

This is the amount of profit attributable to each ordinary share

Profit after tax and dividend shares / Number of ordinary shares in issue

Question 14

What is P/E and its ratio?

Answer 14

Price earnings ratio measures a company’s performance from the market’s point of view. It
shows how many years’ worth of earnings are paid for in the share price.

P/E Ratio = Share Price / EPS

Question 15

What is Dividend Cover and its ratio?

Answer 15

Dividend cover measures how many times the company’s earnings could pay the dividend.

Dividend cover = Profit available for ordinary shareholders (PAT) / Interim + Final Dividend for the year

Question 16

Debt: Equity Ratio

Answer 16

Long-term debt/ Ordinary share capital + Reserves

Question 17

Gearing

Answer 17

Long-term debt/ Ordinary share capital + Reserves + Long Term Debt

Question 18

Interest Cover

Answer 18

PBIT/Interest Payable

The lower the interest cover, the greater the risk that profit will become insufficient to cover
interest payments.

A high level of interest cover may mean that the company is not making ‘good use’ of debt to
fund projects.

Question 19

What is Interest Yield and its ratio?

Answer 19

Interest yield measures the return on investment for the debt holder

Interest Yield: Interest / MV of Debt

Question 20

What is Operational gearing and its ratio?

Answer 20

Measures the extent to which a firm’s operating costs are fixed rather than variable

FC/TC or Contribution/PBIT

The higher the proportion of fixed costs, the higher the operating gearing, the greater the variability in the earnings, the riskier the EBIT!

Question 21

Which of the following statements is NOT correct?
A) ROCE can be defined as profit before interest and tax divided by the sum of shareholders’ funds and prior charge capital
B) ROCE is the product of net profit margin and net asset turnover
C) Dividend yield can be defined as dividend per share divided by the ex dividend share price
D) Return on equity can be defined as profit before interest and tax divided by shareholders’ funds

Answer 21

D) We take Profit after Tax

Question 22

What is agency theory?

Answer 22

Agency theory: the shareholders employ other parties, the agent being the directors, to perform a task on its behalf. Directors may not always act in a way which increases shareholders wealth. We need to achieve goal congruence

Question 23

How can we encourage managers to achieve shareholders objectives?

Answer 23

• Performance Related pay (meeting targets)
• Executive share option schemes
• Regulatory requirements : Corporate governance codes and stock exchange listing regulations

Question 24

What are the 3 E’s for NGO’s

Answer 24

• Economy
• Efficiency
• Effectiveness