Managing Finance & Budgets
Lecture 4 Follow-Up
Activities and Solutions
Activity One
Discuss the following:

Imagine you are the proprietor of a hotel and
restaurant. Identify a series of key ratios which would
help you to monitor on a day to day basis how well
the hotel is performing.
Activity One - Solutions
Key ratios to monitor how well a hotel is performing.
These might include:
 % Room occupancy
 Average customer payment
 Reservations as a % of total occupancy
 Cleaning Costs per room
 Average direct cost per room occupancy
 Total Overheads bill per day’s operation
 Total Salaries as a percentage of turnover
 % food wastage per day
… and many more!
Activity Two
Calculate and comment on profitability ratios for
the two years shown:
SALES
COST OF SALES
OVERHEADS
INTEREST
TAX
DIVIDENDS
SHARE CAPITAL
RESERVES
LONG TERM LOANS
YEAR 1
2,240,000
1,745,400
252,000
24,000
60,200
40,200
300,000
198,300
200,000
YEAR 2
2,681,200
2,072,000
362,800
6,200
76,000
60,000
334,100
302,500
60,000
Activity Two Solution: Gross Margin%
The P & L Account Shows:
 Sales
 Gross Profit
£2,240,000
£494,600
(NB Gross Profit =
Turnover – Cost of Sales)
Gross Margin%
494600 x 100
2240000
=
= 22.1%
The company makes 22p
for every £1 it brings in.
This can be used to pay
overheads etc.
Activity Two Solution: Net Margin%
The P & L Account Shows:
 Sales
 Net Profit after Tax and Dividends
(NB
Net Profit
=
Net Margin%
£2,240,000
£118,200
Turnover – Cost of Sales- Overheads)
=
118200 x 100
2240000
= 10.8%
After paying all outstanding
costs, the company makes
11p for every £1 it brings in.
Activity Two Solution: ROSF%
The P & L Account Shows:
 Net Profit after Tax and Dividends


Share Capital
Reserves
ROSF%
=
£118,200
£300,000
£197,500
£497,500
118200 x 100
497500
= 31.8%
The company is making
32p for every £1 invested
by shareholders.
Activity Two Solution: ROCE%
The P & L Account Shows:
 Net Profit (before Tax & Interest)



Share Capital
Reserves
LT Loans
ROCE%
=
£242,600
£300,000
£197,500
£200,000
£697,500
242600 x 100
697500
= 34.8%
Including loans, the
company makes 35p for
every £1 invested in the
business.
Activity Three
Calculate and comment on liquidity ratios for the
two years shown:
DEBTORS
BANK ACCOUNT
OPENING STOCK
CLOSING STOCK
TRADE CREDITORS
DIVIDENDS OWING
CORPORATION TAX OWING
CASHFLOW FROM OPERATIONS
YEAR 1
240,800
33,500
241,000
300,000
221,400
40,200
60,200
231,000
YEAR 2
210,200
41,000
300,000
370,800
228,800
60,000
76,000
251,400
Activity Three Solution: Current Ratio
Current Assets :
 Trade Debtors
 Bank Account
 Closing Stock Value
£240,800
£33,500
£300,000
£574,300
Current Liabilities:
 Trade Creditors
 Dividends Owing
 Corporation Tax Owing
Current Ratio
= 574300
321800
£221,400
£40,200
£60,200
£321,800
=
1.8
The business owns
almost twice as
much as it owes
Activity Three Solution: Acid Test Ratio
Current Assets excluding Stock :
 Trade Debtors
 Bank Account
£240,800
£33,500
£274,300
Current Liabilities:
 Trade Creditors
 Dividends Owing
 Corporation Tax Owing
Acid Test Ratio
= 274300 =
321800
£221,400
£40,200
£60,200
£321,800
0.9
Excluding stock,
the business owns
almost as much as
it owes..
Activity Three Solution:
Cash-Flow to Obligations Ratio
Current Assets excluding Stock :
 Net Cash-Flow from Operations
Current Liabilities:
 Trade Creditors
 Dividends Owing
 Corporation Tax Owing
Cash-Flow to Obligations =
Ratio
£231,000
£221,400
£40,200
£60,200
£321,800
231,000 =
0.7
321800 The currently available
cash in circulation is
about three-quarters of
what is needed to pay
current debts
Activity Four
Use the figures shown in Activity Two to calculate and
comment on financing ratios for the two years shown.
Profitability (Activity 2)
Sales
Cost of Sales
Gross Profit
Overheads
Net Profit
Interest
Tax
Dividends
Net profit after tax and dividends
Share Capital
Reserves
LT Loans
Year 1
Year 2
2,240,000
1,745,400
494,600
252,000
242,600
24,000
60,200
40,200
118,200
300,000
197,500
200,000
2,681,200
2,072,000
609,200
362,800
246,400
6,200
76,000
60,000
104,200
334,100
301,700
60,000
Activity Four Solution: Gearing

Long Term Loans:
£200,000

Share Capital
Reserves
LT Loans
£300,000
£197,500
£200,000
£697,500


Gearing%
=
200000 x 100 =
697500
28.7%
Just over a quarter of the
company’s financing comes
through loans
Activity Four Solution: Interest Cover

Net Profit:
£242,600

Interest due
£24,000
Interest Cover =
242600 =
24000
10.1
The company makes 10
times as much as it
needs to service its loans
Activity Five
Use the figures shown in Activities Two and Three
and the additional figures shown below to
calculate and comment on efficiency ratios for
the last two years:
CREDIT PURCHASES
NUMBER OF EMPLOYEES
YEAR 1
1,804,400
14
YEAR 2
2,142,800
18
Activity Five Solution:
Stock Turnover Period

Opening Stock Value
Closing Stock Value

Cost of Sales

£241,000
£300,000
£1,745,400
Stock Turnover (Days)
= (241000+300000)/2 x 365
1745400
= 56.7 days
Stock is held on average
for 57 days
Activity Five Solution:
Average Settlement period for Debtors

Trade Debtors

Total Sales
£240,800
£2,240,000
Average Settlement Period
= 240800 x 365
2240000
=
39.2 days
Debtors take 39 days on
average to pay the
money.
Activity Five Solution:
Average Settlement period for Creditors

Trade Creditors

Total Sales
£221,400
£1,804,400
Average Settlement Period
= 221400 x 365
1804400
=
44.7 days
The company takes 45
days on average to pay
its bills.
Activity Five Solution:
Sales to Capital Employed

Total Sales
£2,240,000

Share Capital
Reserves
LT Loans
£300,000
£197,500
£200,000
£697,500


Sales to Capital Employed
=
=
2240000
697500
3.2
The turnover of the
business is three
times the total capital
invested in it.
Activity Five Solution: Sales per Employee

Total Sales

Number of Employees
Sales per Employee
£2,240,000
14
=
2240000
14
=
£160,000
Each employee brings in
£160,000 worth of
business.
Activity Six
Using the figures given in Activities 2 and 3, and the
additional figures below, calculate and comment on
shareholder value for the two years shown:
Number of Ordinary Shares
Preference Dividends/Shares
Market Price Per Share
YEAR 1
600,000
NIL
2.50
YEAR 2
668,200
NIL
3.50
Activity Six Solution: Dividend per Share

Dividends Announced

Number of Shares
£40,200
600,000
Dividend per Share =
40200
600000
=
£0.067
Each shareholder gets 6.7p for
each share they own.
Activity Six Solution: Dividend Payout

Net Profit
Interest
Tax
£242,600
- £24,000
- £60,200

Net profit after interest/tax
£158,400

Dividends Announced


Dividend Payout =
£40,200
40200 x 100
158400
=
25.4%
One quarter of the
total profit is paid
out in dividends to
shareholders.
Activity Six Solution: Dividend Yield

Dividend per share
£0.067

Market Price per Share
Tax Rate
£2.50
20%

NB:
Dividend Yield =
0.067/(1 – 0.2) x 100
2.50
Shareholders are currently getting a
rate of return of 3.35% on their
investment at market value
(compare Inflation ~ 2%)
=
3.35%
20% = 0.2
Activity Six Solution: Earnings per Share

Net Profit
Interest
Tax
£242,600
- £24,000
- £60,200

Net profit after interest/tax
£158,400

Number of shares issued:
600,000


Earnings per Share:
=
158400
600000
The company is making
about 26p for every share
that is held.
=
£0.264
Activity Six Solution: Cash-Flow per Share

Operating Cash-Flow

Number of shares issued:
Cash-Flow per Share:
There is about 40p for
every share in current
circulation within the
company.
£231,000
600,000
=
231000
600000
=
£0.385
Activity Six Solution: Price/Earnings Ratio

Market Price per share:
£2.50

Earnings per share:
£0.264
Price/Earnings Ratio:
The market price of a share is
about 10 times the profit made by
the share. (may be better the other
way round – each share earns
about one-tenth of its current
market value in a year)
=
2.50
0.264
=
9.45
Activity Seven
Discuss the following:
If a business is “overtrading”, do you think the
following ratios would be higher or lower than
normally expected?
(a)
(b)
(c)
(d)
Current ratio
Average stock turnover period
Average settlement period for debtors
Average settlement period for creditors
Activity Seven Solution
In an ‘overtrading’ position, these ratios would be:
(a) Current ratio:
Lower (Liabilities would increase)
(b) Average stock turnover period
Lower (Stock run-outs occur)
(c) Average settlement period for debtors
Higher (if inability to supply means total sales lower)
or Lower (if business chases debt due to shortage of cash)
(d) Average settlement period for creditors
Higher (shortage of cash makes it difficult to pay creditors)