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Business Finance Ratios

Question 1

Indicate whether the following statements are true or false

a) Interest payment form part of EBIT
b) Capital market is exclusively for commercial banks
c) Money market is normally for long term financial assets
d) Earning retained form part of company's financial assets
e) Inventory left at the end of financial year form part of the company's assets
f) Equity owners are different from bondholders
g) Bondholding gives the holder ownership of the company
h) Creditors can initiate the liquidation of the company
i) Growth ratio is one for those ratios that measure how the company has been performing in general and against its own industry
j) Ratios are good tools to measure the company's performance, both financial and otherwise.

Question 2
Using the annexure below calculate liquidity ratio, Leverage and profitability ratio and also interpret the ratios so obtained. PLEASE SEE ATTACHMENTS

Jumbo Trading(PTY) Ltd- Income Statement for the year ending
28 February 20xx

Sales Credit 20 000
Cash 15 000 35 000

Less: Cost of sales 20 000

Opening inventory 4 000
Plus purchases (including transport) 19 000
Less closing inventory 3 000

Gross profit 15 000

Less: Operating/ fixed Expenses: 500 10 000
Depreciation: Vehicle 100
Furniture & equipment 1000
Rent paid 6500
Salaries & Wages 500
Interest on loan 500
Electricity & Water 600
Insurance 200
Bad debts 100
Stationery -
Net income (profit) before tax 5000
Less: tax at 20% 1000
Net income after tax 4000
Less: dividend paid 2000
To: retained earnings 2000

Jumbo Trading (Pty) Ltd- Balance Sheet as at 28 February 20xx

Capital Employed
Share capital 10 000
+ retained earnings 5000
equals: equaty 15 000

Long term loan 5000
= 20 000

Employement of Capital

Fixed Assets 13 000
Vehicles (at book value) 9000
Furniture and equipment(at book value) 4000

Net Working Capital 7000

Current Assets 14 000
Debtors 8000
Inventory(closing) 3000
Bank 3000

Curren Liabilities 7000
Creditors 4000
Provision for taxation 1000
Accrued expenses 2000

= 20 000
Question 3
Explain what will happen to a company if its working capital dries up

Question 4
Give a comprehensive view of the Namibian Finacial market, give example where necessary.

Question 5
What is the difference between a company listed in stock exchange and the unlisted company?

Question 6

Given the following data, calculate cycle for Tutale Investment (Pty) Limited
Sale N$90 000
Cash sale 40 000
Opening inventory 9000
Closing inventory 7000
Purchase, all in credit 52 000
Pat the (debtor) owe 3000
PG (the creditor) 5000
Assets (mostly the building) 55 000
Tax rate 15%

Solution Preview

Business finance
Question 1
Indicate whether the following statements are true or false

a) Interest payment form part of EBIT - False
Reasoning: EBIT is earnings before interest and taxes. Therefore interest payment does not form part of EBIT. Rather, interest is paid using the EBIT.

b) Capital market is exclusively for commercial banks - False
Reasoning: Capital markets are financial markets for the purpose of purchasing and selling financial securities by institutions and individuals. They are not exclusively for commercial banks.

c) Money market is normally for long term financial assets - False
Reasoning: Money market is a financial market in which short-term maturities and high liquid securities are traded. Therefore, it is not normally for long term financial assets.

d) Earning retained form part of company's financial assets - False
Reasoning: Earnings retained form part of company's stockholder's equity.

e) Inventory left at the end of financial year form part of the company's assets - True
Reasoning: Inventory left at the end of financial year is the ending inventory and forms part of current asset and hence part of company's assets too.

f) Equity owners are different from bondholders - True
Reasoning: Equity holders are owners of the company and bond holders are creditors of the company.

g) Bondholding gives the holder ownership of the company - False
Reasoning: Bond holders are creditors of the company and this does not entitle them the ownership to the company.

h) Creditors can initiate the liquidation of the company - True
Reasoning: Creditors can initiate the liquidation of a company by submitting a petition to the court upon non-payment of their debts.

i) Growth ratio is one for those ratios that measure how the company has been performing in general and against its own industry - True

j) Ratios are good tools to measure the company's performance, both financial and otherwise - False
Reasoning: Ratios are good tools to measure the company's financial performance only.

Question 2
Using the annexure below calculate liquidity ratio, Leverage and profitability ratio and also interpret the ratios so obtained. PLEASE SEE ATTACHMENTS

Liquidity ratios:
Current ratio = Current assets/Current liabilities  14000/7000  2.0
Quick ratio = [Bank + Debtors]/Current liabilities  [3000+8000]/7000  ...

Solution Summary

The interest payment forms part of EBIT statements are examined. Money market for long term financial assets are provided.

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