You are presented with the following information for three quite separate and independent companies: 1 The operating
Question:
You are presented with the following information for three quite separate and independent companies:
1 The operating profit before interest and tax for the year to 31 March 19X8 earned by each of the three companies was \(£ 300,000\).
2 The effective rate of corporation tax for all three companies for the year to 31 March 19X8 is 30 per cent. This rate is to be used in calculating each company's tax payable on ordinary profit.
3 An ordinary dividend of \(20 \mathrm{p}\) for the year to 31 March \(19 \mathrm{X} 8\) is proposed by all three companies, and any preference dividends are to be provided for.
4 The market prices per ordinary share at 31 March 19X8 were as follows:
\(£\)
Chan ple 8.40 Ling plc ..... 9.50 Wong plc .....10.38
5 There were no changes in the share capital structure or in long-term loans of any of the companies during the year to 31 March 19 X8.
\section*{Required:}
(a) Insofar as the information permits, prepare the profit and loss account for each of the three companies (in columnar format) for the year to 31 March 19 X8 (formal notes to the accounts are not required);
(b) calculate the following accounting ratios for each company:
(i) earnings per share;
(ii) price earnings;
(iii) gearing (taken as total borrowings (preference share capital and long-term loans) to ordinary shareholders' funds); and
(c) using the gearing ratios calculated in answering part
(b) of the question, briefly examine the importance of gearing if you were thinking of investing in some ordinary shares in one of the three companies assuming that the profits of the three companies were fluctuating.
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