Chapter 5 - Markets, dealing and settlement

Question 1

Current ratio

Answer 1

Current assets ÷ Current liabilities

Question 2

Acid-test ratio

Answer 2

(Current assets – inventory) ÷ Current liabilities

Question 3

Earnings per share

Answer 3

(Net profit after interest, tax and preference share dividends and any minority interests) ÷ Number of
ordinary shares

Question 4

Price/earnings ratio

Answer 4

Current market price of one ordinary share ÷ annual earnings per share

Question 5

Dividend yield

Answer 5

(Actual gross annual dividend paid per share, including interim and final instalments) ÷ Current
market share price as at the time of the dividend payment x 100

Question 6

Dividend cover

Answer 6

Net profit after payment of tax and preference share dividends ÷ Total value of dividends

OR

Dividend cover = Earnings per share ÷ Dividends per share

Question 7

What are the assumptions and applications of the P/E ratio?

Answer 7

Assumptions:
 Market price used is the mid-market price quoted at the close of business on the previous business day and is quoted ex-dividend

 The ratio will change on a daily basis as the price of the share moves

Applications:
 Allows year on year comparisons within the same company, with other companies within the
same sector or the market as a whole

 Allows companies to be compared and contrasted regardless of their size

 When used in conjunction with earnings per share can be used to elicit the potential share price

 Shows a shares relative expensiveness or cheapness

Question 8

What are the filing requirements imposed on quoted companies by Section 447 of The Companies Act?

Answer 8

The directors must deliver annually to the registrar copy of:

 The company accounts
 The director’s report
 The director’s remuneration report