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Comments

  1. Hi John,

    Thank you a million for these great lectures, I really appreciate it from my heart.If you were here in Jamaica I would have certainly find you and give you a big hug…Your lectures are more than helpful as I didn’t understand Financial Management. Thank you again.

  3. Sir,

    Thanks for your good lecture as always.

    Does interest payment being accounted for financial gearing also be included in fixed costs for calculating the operating gearing.

    If I am not wrong fixed cost in the statement of profit or loss include
    1. lease payment
    2. Rents
    3. Debt interest
    4. Fixed salaries
    and so on

  5. Dear Sir,

    In the calculation of P/E ratio, we assume that it will take 16 years for the investor to get back his investment based on current earnings.

    But isn’t certain part of the earnings retained? Wont the investors only receive dividends?

    Thanks

    • Yes, but it is earnings that give rise to dividends. Either a company has low retention and therefore pays high dividends but there will be little growth in dividends; or, alternatively, a company will have high retention and therefore pay lower dividends but there will be growth in dividends. (This is explained and illustrated in Chapter 17 of our free lecture notes).

      That is why, when comparing companies, that looking at the dividends does not mean much (because they might have different dividend policies) and therefore why PE’s are more useful in practice.

  8. Hi Sir John,
    That was a great lecture as always.

    My problem is you said to the Financial Management Accountant, preference shares are just like any other debt because fixed dividend is paid on it which is just like interest. Why then when calculating Interest Yied, the preference share was not involved and in calculating the other ratios like EPS, P/E etc, it was also left out from equity (shares)? I we then not totally ignoring it now?

  9. Hello Sir John, thank u for the wonderful lectures. If investors are prepared to pay more in the hope that the company does better and eventually have more earnings in future, won’t the MV of shares not go up as well? So, in a sense the PE will not reduce so much? Unless, rate of increase of earnings is much more than rate of increase of MV. So, will it be correct if we compare PE for a long period of time, say for 5 years instead of only 2 years.

    • You are correct in saying that the MV will go up if investors expect that the company will do better in the future.

      However the PE’s that are quoted in the newspapers (and used in the exams) only look at the current earnings and current share price.

  11. Hi Sir,

    Thanks for making things so easy for me. here’s a point, I am bit confused on:

    The P/E Ratio above, you said it’s 83/5.2=15.96

    but shouldn’t it be 0.83/5.2= 0.15 times or 15.96% or it should always be in percentage?

    Many Thanks!

  13. Hi sir I’ve a question
    A company can maximise its value by adopting a capital structure that minimises it’s weighted average cost of capital .could you please explain whether or not such an optimal capital structure exists for a company.
    Many thx

    • In practice yes – because the WACC stands to change as the gearing changes.

      In theory (according to Modigliani and Miller) then without tax the WACC will not change and so there is no such thing as optimal gearing; but with tax then there is an optimal – they should be as highly geared as possible because this will reduce the WACC. I do explain and illustrate this in the lectures.

      (M&M may not work perfectly in practice because of the various assumptions they made, which do not all hold true because things don’t work perfectly in real life)

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