ACCTG 151G Tutorial 5

Contents:
Module 5 & 6
1. Place the following products on the risk return graph in
approximately the places you think they should sit.
 Real Estate
 Company Bonds (Debentures)
 Precious Metals
 Ordinary Shares
 Bank Term Deposits

Real Estate

Precious Metal
Ordinary Shares

Company Bonds
Term Deposit
 2. Explain the difference between an investment in Real
Estate and an investment in Ordinary Shares in terms of
their relative risk
 Real Estate is not particularly “liquid”. There are not many buyers and
sellers at any one particular time and it can take some time to sell
your investment and receive cash. The price of the investment can
also vary significantly from time to time and each investment has a
high value. The time to conclude a transaction and receive cash can
become protracted and transaction costs are relatively high.
The market for Ordinary Shares (NZX) is relatively liquid. There are many
buyers and sellers communicating their requirements on a frequent and
regular basis. Prices are disclosed on the NZX and individual transactions
are of comparatively low value. Transaction costs are fairly low and
settlement (getting your money) occurs fairly quickly.
3. What are the similarities and differences between an
Ordinary Share and a Preference Share?

 Both are forms of Equity (or ownership) of a business and are

usually perpetual
 An OS may or may not pay a dividend, a PS normally always
promises to pay a dividend
 An OS dividend is usually linked to the firm’s profits, a PS
dividend is usually a fixed %
 An OS allows the owner to vote about the way the company
is run, a PS usually has no voting rights
ABC Ltd had a good year with sales of $800,000 and a net
profit of $100,000. The company has two hundred
thousand shares issued and the directors agreed to pay a
dividend equivalent to half the profits. The shares of ABC
are currently selling for $2.50 per share on the NZX.
4. What is ABC’s Net Profit Margin?
Net profit = $100,000
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
Net Profit Margin = 𝑆𝑎𝑙𝑒𝑠 Sales = $800,000

$100,000
= $800,000

= 0.125 or 12½%
 5. What is ABC’s Return on Equity?

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
ROE = Net Income = $100,000
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝐹𝑢𝑛𝑑𝑠
Shareholder’s Fund =
=
$100,000 200,000 shares * $2.50 per share
$500,000
= $500,000

= 20%
6. Calculate ABC’s Earnings Per Share (EPS)

EPS =
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 Net Profit = $100,000
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 𝑜𝑛 𝑖𝑠𝑠𝑢𝑒
Number of Shares on issue = 200,000
$100,000
=
200,000

= 50c per share

 7. Calculate ABC’s Dividend Yield

𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

Dividend Yield = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

Dividend = Half the profit as stated

Profit = $100,000 so Dividend = $50,000
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 $50,000
Annual Dividend per Share = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 = 200,000 = $0.25

Market price per share = $2.50

$0.25
= $2.50
= 10%
8. What is ABC’s Price Earnings (P/E) ratio?

𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒

P/E = 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

Market Price of Share = $2.50

Earnings per Share = Net Profit / Number of Shares

Net Profit = $100,000 # of Shares = 200,000

$100,000 / 200,000 = $0.50

$2.50
= = 5
$0.50
9. Explain what the P/E ratio means.

Investors in ABC shares are willing to pay a price that’s 5 times the
profits of ABC
This can give an indication about investors’ optimism about the
future of ABC
Owning a share is effectively owning ABC’s future profits the
higher the P/E the more optimistic shareholders are about the
future of the company