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Question 8.Act.14: Using the projected figures above, compute the return on ord...

Using the projected figures above, compute the return on ordinary shareholders’ funds ratio, earnings per share, interest cover ratio, gearing ratio and degree of financial gearing, assuming the business issues:

(a) shares

(b) loan notes.

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These ratios are as follows:

Shares Loan notes
Return on ordinary shareholders’ funds (ROSF)
ROSF=\frac{Earnings  available  to  ordinary  shareholders}{Ordinary  shares  plus  reserves}
Share issue ROSF=\frac{£12.6m}{£93.8m} × 100\% 13.4%
Loan notes ROSF=\frac{£12.0m}{£73.2m}× 100\% 16.4%
Earnings per share (EPS)
EPS=\frac{Earnings  available  to  ordinary  shareholders}{No.  of  ordinary  shares}
Share issue EPS=\frac{£201.1m}{£68m} × 100\% 29.6p
Loan notes EPS=\frac{£18.6m}{£60m} \times 100\% 31.0p
Interest cover ratio
\frac{Profit  before  interest  and  taxation}{Interest  payable}
Share issue interest cover ratio=\frac{£29.2m}{£2.4m} 12.2 times
Loan notes interest cover ratio=\frac{£29.2m}{£4.4m} 6.6 times
Gearing ratio
=\frac{Loan  capital}{(Ordinary  shares + Reserves + Loan  capital)} × 100\%
Share issue gearing ratio =\frac{£20.0m}{\left(£93.8m + £20m\right) } \times 100\% 17.6%
Loan notes issue gearing ratio=\frac{£40.0m}{\left(£73.2m + £40.0m\right) } × 100\% 35.3%
Degree of financial gearing
 = PBIT/PBIT – I (there  are  no  preference  shares  in  issue)
Share issue degree of financial  gearing=\frac{£29.2m}{\left(£29.2m − £2.4m\right) } 1.1
Loan note issue degree of financial gearing =\frac{£29.2m}{\left(£29.2m − £4.4m\right) } 1.2

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