Chapter 9: Capital Structure and Investment Ratios

Test Bank

Type: multiple choice question

Title: Chapter 09 Question 01

1) If Sybil Ltd issues shares with a £1 nominal value, for £2 per share, then the gearing proportion and the acid test ratio will be affected as follows:

a. Gearing will increase and the acid test ratio will reduce.

b. Gearing will reduce and the acid test ratio will reduce.

c. Gearing will reduce and the acid test ratio will increase.

d. Gearing will increase and the acid test ratio will increase.

Type: multiple choice question

Title: Chapter 09 Question 02

2) Which of the following is not true?

a. Earnings per share measures the profit made per ordinary share.

b. Dividend yield measures the actual return that shareholders are receiving on their shares.

c. The price to earnings ratio compares the market price of a share to the dividends per share.

d. Dividend cover measures the extent to which profits cover dividend payments.

Type: multiple choice question

Title: Chapter 09 Question 03

3) An extract from Alan plc's Statement of financial position as at 30 September 2024 is given below:

£’000

Non-current assets 6,210

Current assets 1,130

7,340

Equity and Liabilities

Ordinary share capital          4,000

Share premium 865

Retained profit 1,295

Long term loan 1,180

7,340

The gearing proportion at 30 September 2024 was:

a. 50.8%.

b. 16.1%.

c. 24.2%.

d. 19.2%.

Type: multiple choice question

Title: Chapter 09 Question 04

4) Howard plc has a gearing proportion of 30% at 30 September 2024. Which of the following statements is NOT TRUE?

a. An ordinary share issue will reduce the gearing proportion.

b. Taking out a short-term loan issue will increase the gearing proportion.

c. Repayment of a long-term loan will reduce the gearing proportion.

d. Repayment of a short-term loan will reduce the gearing proportion.

Type: multiple choice question

Title: Chapter 09 Question 05

5) Two competitor companies, Milly Ltd and Molly Ltd, have the following ratios at 31 December :

Milly Molly

Gearing 65% 12%

Interest cover 8.1 times 5.2 times

Which of the following statements are true?

a. Milly’s capital structure is less risky than Molly but can cover its interest obligations more easily.

b. Milly’s capital structure is less risky than Molly and it is less able to cover its interest obligations.

c. Milly’s capital structure is more risky than Molly and it is less able to cover its interest obligations.

d. Milly’s capital structure is more risky than Molly’s but can cover its interest obligations more easily.

Type: multiple choice question

Title: Chapter 09 Question 06

6) Graham plc has the following information for the year to 30 June:

Profit for the year £4.2 m

Ordinary dividend paid £1.8 m

Number of ordinary shares 18 m

Market price at 30 June £2.90

Calculate the earnings per share for Graham Plc as at 30 June.

a. 10 pence

b. £2.33

c. 13.3 pence

d. 23.3 pence

Type: multiple choice question

Title: Chapter 09 Question 07

7) Graham plc has the following information for the year to 30 June:

Profit for the year £4.2m

Ordinary dividend paid £1.8m

Number of ordinary shares 18m

Market price at 30 June £2.90

Calculate price to earnings for Graham Plc as at 30 June.

a. 1 time

b. 12 times

c. 22 times

d. 29 times

Type: multiple choice question

Title: Chapter 09 Question 08

8) Graham plc has the following information for the year to 30 June:

Profit for the year £4.2m

Ordinary dividend paid £1.8m

Number of ordinary shares 18m

Market price at 30 June £2.90

Calculate the dividend yield for Graham plc.

a. 3.4%

b. 10%

c. 62%

d. 29%

Type: multiple choice question

Title: Chapter 09 Question 09

9) Graham plc has the following information for the year to 30 June:

Profit for the year £4.2m

Ordinary dividend paid £1.8m

Number of ordinary shares 18m

Market price at 30 June £2.90

Calculate the dividend cover for Graham plc.

a. 0.42 times

b. 2.3 times

c. 10 times

d. 1.33 times

Type: multiple choice question

Title: Chapter 09 Question 10

10) Shareholders’ funds in a company are made up of:

a. Share capital plus all of the reserves.

b. Share capital plus all of the reserves plus long-term loans.

c. Share capital only.

d. Share capital plus share premium.