Managerial Finance

A. Calculate the ratios in respect of Luader Plc for the year just ended.
B. Compare ratios with the industrial averages given and suggest reasons for any differences.
Average Luader Plc
a. P/E ratio: 9 < 10.6061
The P/E ratio shows that Luader Plc is slightly larger and better established than the similar companies. The higher ratio means that the Luader Plc belongs to low risk industry and also that company has good growth prospects.In addition, higher P/E rate indicates that the company has had poor financial results but investors expect the company to improve its performance.
b. Gearing ratio: 40% < 64.94%
The gearing ratio of Luader Plc indicates financial risk and this risk is borne by the ordinary shareholders. Also higher gearing level than the industrial average means the greater the amount of interest payments and the less the proportion of earnings available to equity. Moreover further increase of gearing may get Luader Plc into difficulty meeting its interest commitments and may face the risk of bankruptcy.
c. Dividend cover: 2.5 < 4.125 times
The higher dividend cover than the industrial average indicates that Luader Plc is able to maintain the same dividend in the future years even if earnings will drop. Also dividend cover of 4.125 means that high proportion of profits are being retained as a source of finance (approximately 65% of the Luader Plc profits are being retained).
d. Dividend yield: 3.1% > 2.2857%
The lower dividend yield indicates that investors are satisfied with a low rate of return as they can look forward to higher dividends in the future and capital growth in the value of their shares. On the other hand, Luader’s Plc low dividend yield could mean the company is in trouble and is unable to pay worthwhile dividends.
C. Calculate WACC (Weighted Average Cost of Capital) and comment on any reservations you...

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