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I don’t understand the anwers given in the kit . Pls help me
The question is as follows :
The following information is available for Pind Co , a manufacturing company. You are provided with an extract from the income
$
Operating profit 42000
Interest charges. (16000)
PBT 26000
Taxation. (5460)20540
Pind Co has an operating profit margin of 15%. You are provided with an extract from its statement of financial position
$
Equity and reservesTotal equity and reserves 420000
Non current liabilities
Loan. 150000
5% Preference shares. 40000Current liabilities
Payable. 50000
Which TWO of the following statements are correct
(1). A reduction in the tax rate will improve the interest cover ratio
(2). If the level of long term debt in Pind Co is reduced , the interest cover and dividend cover ratios will improve
(3). If the level of long term debt in Pind Co is reduced , the asset turnover ratio will improve.
(4). Financial gearing is a measure of risk , but interest cover is a measure if profitability
A (1) and (2)
B (2) and (3)
C. (3) and (4)
D. (1) and (4)Pind Co has a current ratio of 1.5 and a quick ratio of 0.9
If cash in the bank us used to pay some of the payable, what will be the effect on the current and quick ratios?
Current ratio. Quick ratio
A. Increase. Increase
B. Increase. Decrease
C. Decrease. Increase
D. Decrease. Decrease3. If Pind Co has a receivables to cash ratio of 2:2.5 what are the receivable days ( to the nearest whole day). __________ days
In future please ask about which bit of the answers you do not understand rather than simply expect me to provide a full answer.
First question:
Tax does not affect interest cover, so (1) is not correct
Less debt means less interest, therefore interest cover improves. Less interest means more profit available for shareholders therefore dividend cover improves. So (2) is correct.
Less debt means higher net assets, therefore asset cover improves. So (3) is correct.
Gearing and interest cover are both measures of risk, so (4) is not correct.Second question:
For questions like this, best is to invent some figures and see what happens.
Suppose current liabilities are $100. The current assets are $150 and current assets excluding inventories are $90.
If the use (say) $20 cash to pay current liabilities, then current assets are $130 and current assets excluding inventories are $70. Current liabilities are $80. So current ratio becomes 130/80 = 1.625 i.e. the ratio increases. Quick ratio becomes 70/80 = 0.875 i.e. the ratio decreases.Third question:
Because the quick ratio is 0.9, the current assets excluding inventory must be 0.9 x 50,000 = 45,000. This must be cash plus receivables, and since receivables/cash = 2/2.5, the receivables must be (2/(2 + 2.5)) x 45,000 = 20,000.
The sales for the year are 42,000/15% = 280,000
Therefore the receivables days are 20,000/280,000 x 365 = 26 daysI am surprised that you found these questions in a PM Revision Kit, because they are more Paper F3 questions 🙂
From my understanding I knew that we include tax when calculating finance cost. So then how come option 1 in the first question could be correct. ? Another doubt which I have is from option 3 that Turnover ratio will not improve when the value of assets is increased since it is inversely proportional to the turnover ratio
For (1), the question is nothing to do with the cost of finance (which is not examinable in Paper PM anyway!).
It is financial accounting, and interest cover is profit before interest and tax divided by interest.For (3), sorry – I mistyped. Less debt means lower capital employed. Asset turnover is revenue dividend by capital employed, therefore asset turnover increases.
Have you watched my free lectures on financial performance measurement? The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
Well, for the second question I had checked with different numbers ie current assets = $50,
Current liabilities = $ 20 , cash = $10, Current assets excluding inventory = $ 40Quick ratio = $40 – $10/ $ 20 – $10 = $30/ $10 = 3
So in my numbers quick ratio has increased ?
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