Shareholders RatiosTestShareholders RatiosTest

This test consists of 10 questions This test consists of 10 questions designed to test your understanding of designed to test your understanding of those Ratios that shareholders use to those Ratios that shareholders use to judge company performance.judge company performance.

The links provide you with a choice of The links provide you with a choice of answer, along with explanations and answer, along with explanations and solutions.solutions.

You will need a calculator to complete You will need a calculator to complete this test.this test.

Question 1.Question 1.

A firm has a Price / Earnings ratio of 36. Does A firm has a Price / Earnings ratio of 36. Does this indicate,this indicate,

a. an expected growth in profits?a. an expected growth in profits?

b. an expected increase in share price?b. an expected increase in share price?

c. an expected fall in earnings?.c. an expected fall in earnings?.

Typically P/E ratios of between 10 and 20 are found in most business sectors. With P/E ratios that are higher than this, the expectation must be that earnings are likely to grow more rapidly than the norm.Your answer is correct.

Typically P/E ratios of between 10 and 20 are found in most business sectors. An increase in share price will push up a P/E ratio to an even higher level. Try again.

If earnings are expected to fall, P/e ratios are likely to be at or below the norm. Typically P/E ratios of between 10 and 20 are found in most business sectors. Try again.

Question 2.Question 2.

A firm has a share price of 150p, 1,000,000 A firm has a share price of 150p, 1,000,000 shares in issue, and earnings of £178,000. shares in issue, and earnings of £178,000. What is the firms P/E ratio?What is the firms P/E ratio?

A. 66.66A. 66.66

B. 5.61B. 5.61

C. 8.42C. 8.42

The formula to use is;P/E ratio = price per share divided by earnings per share.

Earnings per share = total earnings divided by no. of share issued.

The formula to use is;P/E ratio = price per share divided by earnings per share.

Earnings per share = total earnings divided by no. of share issued.

Correct.

Question 3.Question 3.

Divided yield is a measure of?Divided yield is a measure of?

A. Total earnings per shareA. Total earnings per share

B. % return on share on an annual basisB. % return on share on an annual basis

C. capital gainC. capital gain

Total earnings is measured by dividend, not dividend yield

Correct

Capital gain is a measure of growth in value of shares.

Question 4.Question 4.

A firm has a dividend yield of 3%. Should the A firm has a dividend yield of 3%. Should the shareholders ?shareholders ?

A. sell because higher returns can be found in a A. sell because higher returns can be found in a building societybuilding society

B. buy more shares as inflation is lower than B. buy more shares as inflation is lower than 3%.3%.

C. consider capital gain before making a C. consider capital gain before making a decisiondecision

Remember investors buy shares for 2 reasons, dividend yield and capital gain

Remember investors buy shares for 2 reasons, dividend yield and capital gain

Correct, investors buy shares for 2 reasons, dividend yield and capital gain

Question 5.Question 5.

Which of the following defines capital gain?Which of the following defines capital gain?

A. A increase in earnings per share.A. A increase in earnings per share.

B. An increase in price of a share.B. An increase in price of a share.

An increase in earnings per share will probably lead to capital gain i.e. an increase in the price of a share, but it is not the same thing!

Correct, capital gain is measured by increased price and therefore value of shares

Question 6.Question 6.

A firm has a share price of 356p and pays a A firm has a share price of 356p and pays a dividend of 11p a share. What is the dividend of 11p a share. What is the dividend yield?dividend yield?

A. 3.09%A. 3.09%

B. 11%B. 11%

C. 32.36%C. 32.36%

Correct

Dividend yield is calculated using the following formula

Dividend Yield = dividend times 100 share price 1

Dividend yield is calculated using the following formula

Dividend Yield = dividend times 100 share price 1

Question 7.Question 7.

Which of the following defines earnings per Which of the following defines earnings per share?share?

A. Total revenue of the firm divided by the A. Total revenue of the firm divided by the number of shares in issue.number of shares in issue.

B. Trading Profit, divided by number of B. Trading Profit, divided by number of shares in issue.shares in issue.

EPS is a measure of profits earned that can be attributed to each share held

Correct

Question 8.Question 8.

Which of the following firms is likely to have Which of the following firms is likely to have the highest P/E ratio?the highest P/E ratio?

A. A package holiday firmA. A package holiday firm

B. An internet service providerB. An internet service provider

C. British SteelC. British Steel

High levels of expected growth, often lead to a high P/E ratio. In a mature marketthis high growth is unlikely

High levels of expected growth, often lead to a high P/E ratio. In an immature marketthis high growth is likely, but there are increased risks to capital

High levels of expected growth, often lead to a high P/E ratio. In a mature marketthis high growth is unlikely

Question 9.Question 9.

An investor holds 6,000 shares which were An investor holds 6,000 shares which were purchased for 37p, the current price is 56p. purchased for 37p, the current price is 56p. What is the investors total capital gain?What is the investors total capital gain?

A. £2220A. £2220

B. £3360B. £3360

C. £1140C. £1140

To calculate total capital gain ;

Number of shares times ( current share price - purchase price)

To calculate total capital gain ;

Number of shares times ( current share price - purchase price)

Correct

Question 10.Question 10.An investor buys 4000 shares for 40p each, An investor buys 4000 shares for 40p each,

and sells then 3 years later for 52p each. For and sells then 3 years later for 52p each. For each of the 3 years he is paid a dividend of each of the 3 years he is paid a dividend of 2p. What was his annual total yield on the 2p. What was his annual total yield on the investment?investment?

A. 10%A. 10%

B. 5%B. 5%

C. 15%C. 15%

To calculate his total yield, you need to calculate dividend yield, and add to this capital gain as an annual yield.

To find capital gain as an annual yield, find annual growth in share price, and express this as a yield of purchase price i.e a %.

To calculate his total yield, you need to calculate dividend yield, and add to this capital gain as an annual yield.

To find capital gain as an annual yield, find annual growth in share price, and express this as a yield of purchase price i.e a %.

Correct. You have added annual capital gain, expressed as a yield on purchase price, toannual dividend yield.

You have now completed the test. For further more detailed revision please use the case studies on

the ALoA web site. www.aloa.co.uk