Practice Activity 10.10 Computation of shareholder ratios

The facts are the same as practice activity 10.9.

Required:

i. Calculate five shareholder ratios;

ii. Discuss the implications of the shareholder ratios of Garfield Ltd; and

iii.Discuss the implications of the shareholder ratios of Garfield Ltd relating to the industry average ratios provided by the financial analyst.

Note: Work to the nearest two decimal places.

See the suggested answer to practice activity 10.10 here.

Suggested answer to practice activity 10.10

i. Five shareholder ratios are:

Dividend paid = ₦10,645.8

Dividend per share = ₦(10,645.8/350,000)*100kobo = 3.04 kobo

The market price of an ordinary share in Garfield Limited at 31st December 2016

was ₦1.40.

Convert 1.40 to kobo

100 kobo = ₦1

X = ₦1.40

X= 140 kobo

Dividend yield = (3.04/140)*100 = 2.17%

= ₦ 42,583.2/ ₦ 10,645.8 = 4 times

= ₦10,645.8/350,000 * 100 kobo = 3.04 kobo

= ₦42,583.2/350,000 *100 kobo = 12.17 kobo

=140 kobo/12.17 kobo

= 11.50 times

ii. Implications of the shareholder ratios of Garfield Ltd are:

1. Dividend yield: This ratio assesses the actual rate of return of the dividend paid to a company’s market price.

2. Dividend cover: This ratio measures the percentage of the ordinary dividend in relation to the monetary value available for allocation to the ordinary shareholders. Garfield Ltd.’s dividend is four times covered, which means that a quarter of the available profits are being shared as dividends.

3. Dividend per share: This ratio measures the proportion of total dividend in relation to the quantity of issued ordinary shares.

4. Earnings per share (EPS): The proportion of the year’s profit after tax to the volume of ordinary shares outstanding is computed to determine the EPS.

5. Price-earnings ratio: The ratio measures a share’s market price in relation to a company’s earnings.

iii. Discussion of the implications of the performance ratios of Garfield Ltd relating to the industry average ratios provided by the financial analyst:

1. Dividend yield: This ratio assesses the actual rate of return of the dividend paid to a company’s market price. The dividend yield of Garfield Ltd is lower than that of the industry average.

2. Dividend cover: This ratio measures the percentage of the ordinary dividend in relation to the monetary value available for allocation to the ordinary shareholders. Garfield Ltd.’s dividend is four times covered, which means that a quarter of the available profits are being shared as dividends. The industry average shows that one-fifth of the company’s profits are shared as dividends. More of the industry average’s dividend is covered in the available profits.

3. Dividend per share: The DPS measures the proportion of total dividend in relation to the quantity of issued ordinary shares. The industry average has a higher dividend per share compared to Garfield Ltd.’s DPS.

4. Earnings per share: measures the proportion of the year’s profit after tax to a volume of outstanding ordinary shares. The industry average has higher earnings per share compared to Garfield Ltd.

5. Price-earnings ratio: measures a share’s market price in relation to a company’s earnings. The price-earnings ratio of Garfield Ltd is greater than the industry average. This shows that the demand for the ordinary shares of Garfield Ltd is greater than those of the industry’s competitors.