Sally Gorden seeks your assistance to decide whether she should invest in Ruby pic or Sapphire pic. Both companies are quoted on the London Stock Exchange. Their shares were listed on 20 June 20X4 as Ruby 475p and Sapphire 480p.

The performance of these two companies during the year ended 30 June 20X4 is summarised as follows:

On 1 October 20X3 Ruby pic issued 500,000 ordinary shares of 50p each at a premium of 20%. On I April 20X4 Sapphire pic made a I for 2 bonus issue. Apart from these, there has been no change in the Issued capital of either company during the year.
Required:

(a) Calculate the earnings per share (EPS) of each company.

(b) Determine the price/earnings ratio (PE) of each company.

(c) Based on the PE ratio alone, which company’s shares would you recommend to Sally?

(d) On the basis of appropriate accounting ratios (which should be calculated), identify three other matters Sally should take account of before she makes her choice.

(e) Describe the advantages and disadvantages of gearing.
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Operating profit Interest and similar charges Taxation Profit after taxation Interim dividend paid Preference dividend paid Ordinary dividend paid The companies have been financed on 30 June 20X4 as follows: Ordinary shares of 50p each 15% preference shares of l each Share premium account Retained earnings 17% debentures 12% debentures Ruby plc 000 Sapphire plc 000 588 445 (144) (60) 444 385 (164) (145) 280 240 (30) (90) (60) (160) Ruby plc Sapphire plc 000 000 1,000 1,500 600 60 250 450 800 500 2,710 2,450