PART 5 (financial ratios)

Question 1

Activity ratios

• definition
• (3)

Answer 1

How effectively a business is using its resources

• Average collection period
• Average inventory period
• Turnover rate

Question 2

Average collection period

Answer 2

= (accounts receivables / annual sales) x 365 = … days

Question 3

Average inventory period

Answer 3

= (inventory level / annual COGS) x 365 days = …. days

Question 4

Turnover rate

Answer 4

= sales / total assets

Question 5

Valuation ratios

- definition

Answer 5

Assess performance. Does it meet the stockholders’ expectation? Is it used by investors for assessing the attractiveness of shares.

Question 6

Earnings per share

Answer 6

= net profit / number of shares

Question 7

Price to earnings ratio

Answer 7

= market price of share / EPS

Question 8

Market to book ratio

Answer 8

= market value / book value

Question 9

Dividend yield

Answer 9

= dividend per share / market price per share

Question 10

total yield

Answer 10

(dividend per share + market price change) / market price per share begin year

Question 11

dividend cover

Answer 11

= net earnings / dividends

Question 12

pay out ratio

Answer 12

= dividends / net earnings