Question

QUESTION 4

Extracts of the financial statements of Prestige Limited for 2019 are given below.
REQUIRED
4.1 Calculate the following ratios for 2019. Where applicable, round off answers to two
decimal places.
4.1.1 Gross profit margin
4.1.2 Net profit margin
4.1.3 Return on equity
4.1.4 Dividends per share
4.1.5 Acid test ratio
4.1.6 Debt-equity ratio
4.1.7 Finance cost coverage

4.2 Comment on the following ratios:
2019 2018
4.2.1 Inventory turnover 7.5 times 9.5 times
4.2.2 Average collection period 40.50 days 26.35 days
4.2.3 Earnings per share 15.75 cents 20.50 cents

INFORMATION
PRESTIGE LIMITED
EXTRACT OF STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2019
R
Sales 4 000 000
Cost of sales 2 700 000
Earnings before interest and taxes 500 000
Interest expense 45 000
Profit before tax 450 000
Profit after tax 315 000




EXTRACT OF STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2019
R
Non-current assets 2 500 000
Current assets 1 000 000
Equity 2 700 000
Non-current liabilities 450 000
Current liabilities 350 000

Note:
1. Inventories on 31 December 2019 amounted to R360 000.
2. The issued share capital of Prestige Limited consisted of 2 000 000 ordinary shares.
3. Total dividends for the year ended 31 December 2019 amounted to R225 000.
4. Credit terms to debtors are 30 days.

Answer 1

Gross Profit Margin = Gross Profit / Net Sales * 100 = ( Sales - Cost of sales ) / Sales * 100

= ( 4000000 - 2700000 ) / 4000000 * 100

= 1300000 / 4000000 * 100 = 32.50%

Net Profit Margin = Net Profit / Sales * 100

= 315000 / 4000000 * 100 = 7.88%

Return on Equity = Profit After Tax / Shareholder's equity

= 315000 / 2700000

= 11.67%

Dividend Per share = Total Dividend Paid / No of equity shares outstanding

= 225000 / 2000000

= R 0.11

Acid Test Ratio = ( Current Assets - Inventory ) / Current Liabilities    = ( 1000000 - 360000 ) / 350000

= 640000 / 350000

= 1.83

Debt Equity Ratio = Long term debts / Shareholders equity

= 450000 /2700000

= 0.17

Finance Cost coverage = Earning Before Interest & Tax / Finance cost

= 500000 / 45000

= 11.11