Analysis and Interpretation Questions and Answers Grade 12

Current assets : current liabilities = \(4\ 180\ 200 : 1\ 678\ 900\)

\(2{,}5 : 1\)

Interim: \(182\ 000 \div 910\ 000 \times 100 = 20\) cents (910 000 shares in issue)

Final: \(212\ 500 \div 850\ 000 \times 100 = 25\) cents (850 000 shares at year end)

Dividends per share = 45 cents

Cost of sales = \(5\ 950\ 000 - 2\ 700\ 000 = \text{R}3\ 250\ 000\)

Average stock = (\(1\ 120\ 900 + 970\ 100\)) / \(2 = \text{R}1\ 045\ 500\)

\(\frac{3\ 250\ 000}{1\ 045\ 500}\)

3,1 times

Dividend pay-out rate = DPS / EPS x 100

2024: \(89 \div 101 \times 100 = 88{,}1\%\)

2025: \(60 \div 112 \times 100 = 53{,}6\%\)

The pay-out fell from \(88{,}1\%\) to \(53{,}6\%\).

The two effects of the change in dividend policy are:

1. More profit is retained: the pay-out fell from \(88{,}1\%\) to \(53{,}6\%\), so funds are kept for future expansion of the company.
2. Shareholders should benefit later, because the retained funds will be used to grow the business, and cash flow is protected because less cash leaves as dividends.

The return on shareholders' equity rose from \(12{,}9\%\) to \(19{,}1\%\) (up 6,2 percentage points). This is well above the \(7{,}5\%\) interest shareholders could earn on an alternative investment, so their money is working better in the company.

Earnings per share increased from 101 cents to 112 cents (up 11 cents), which shows the company is more profitable.

The market price rose from 425 cents to 885 cents (up 460 cents) and is now above the net asset value of 675 cents (by 210 cents). Investors are willing to pay more than the shares are worth on paper, which shows confidence in the company and demand for its shares.

The risk and gearing of the company are shown by two indicators:

1. Debt-equity ratio: it improved from \(0{,}5 : 1\) to \(0{,}27 : 1\), so the company relies less on loans and the financial risk is low.
2. Return on capital employed: it rose from \(16\%\) to \(20{,}2\%\) (up 4,2 percentage points) and is above the \(13\%\) interest on loans, so the company is positively geared and borrowing is paying off.

The three reasons why the directors prefer an additional loan are:

1. The debt-equity ratio of \(0{,}27 : 1\) is low, so the company can still borrow safely.
2. A loan does not dilute the current shareholders' interest or voting power, because no new shares are issued.
3. The return on capital employed (\(20{,}2\%\)) is higher than the interest rate on loans (\(13\%\)), so the borrowed money earns more than it costs. Also, the loan and interest stop once repaid, while dividends on shares continue indefinitely.