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hi sir,
i do not know how to sort out the relevant ratios asked by examiner e.g. Discuss ,with supporting calculations,the possible effects on Abc co. of an increase in interest rates?. I am not referring any Qs but there are plenty of Qs where this type of answers hav been asked anwer with supportig calculations etc. Sometimes it seems all the ratios we know are relevant but when seen the answer differs .. please help.
thanks
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A past question of this nature is GORWA (Q2 December 2008)
There is no “magic pill” for any exam question! But having said that the approach to adopt for a Financial Analysis question is really quite straight forward.
(1) Learn a few key ratios under the following headings:
Profitability
Stock Market / Shareholders
Liquidity
Working Capital
Gearing … esp., Capital Gearing
(2) A question an Financial analysis assumes you have put the work in and that you know the syllabus OVERALL.
(3) Relate the question (EXACTLY) to the above headings … watching the time available and the marks available… YOU HAVE TO SELECTIVE!
(4) In the case of Interest Rate Risk therefore you will wish to look at:
(a)the Balance between Floating and Fixed Rate debt … an Internal Hedging Technique called “smoothing”
(b) the relative COST of each of these sources of debt … the Finance Costs
(c) the level of Gearing itself …D/E
(d) other relevant ratios would be Interest Cover, Dividend Cover, Operational Gearing
(5) Now you have the key ratios to match the question … so CALCULATE and EXAMINE these … looking at the trends, change, growth over time etc., or vis a vie the industry averages etc., and you are off !
(6) if you have the time and a good grasp of the syllabus you might look at WACC, Sensitivity analysis, Business risk< systematic Financial risk the impact on Ke (the cost of Equity), etc., etc.,/ Hope you've got the idea, Peter
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