Business Finance: Ratios, Cash Conversion Cycle, Credit Monitoring, and Agency Problem

BUSINESS FINANCE

Answer 1.
(a)
Earnings per share=
Earnings available to common
shareholders
Number of shares of common stock
Price earnings
ratio=
Market price per share * Earning per
share
Book value per
share = Common stock equity
Number of shares of common stock
Market/Book ratio= Market value of share
Book value of share
Particulars 2016 2017
Earnings per share 1.50 1.64
Price- Earnings
ratio 37.50 45.82
Book value per
share 20 20.91
Market/Book ratio 1.25 1.34
(b) The primary objective of every company is to earn profits. Apart from profit
maximisation the company also has to maximise the wealth of the shareholders in order to
survive and grow in the long run. We can see that EPS is increasing over the years along with
the MPS. So, we can say that the company has been performing well in financial grounds. It
is a matter of common sense that if the earning of the company increases then the dividend of
the shareholders would also increase which would help in the appreciation of the stock price
(Taillard, 2013). PE ratio can be calculated by multiplying market price of the shares to the

EPS. Both increase in market price and EPS reflect a higher profitability. Therefore, we can
say that the increasing PE ratio also reflects the improving financial performance of the firm.
(c) Asset turnover ratio helps in evaluation the financial performance of the company. It helps
us to know whether the company is using its assets efficiently or not. A higher asset turnover
ratio is considered to be favourable because it indicates that the company is able to generate
enough sales using its assets. The ratio is considered to be good when it is higher than one
but it can be well analysed by comparing it to the industry standards. This ratio helps the
stakeholders to know the level of efficiency at which the company is operating.