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Ratios, Product Cost and Gross Margin Worksheet Solutions

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Accounting

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June 2004 Examiner's Solution
Case S o l u t i o n 1
1. Compute and contrast the following key ratios for both companies:
i. Current ratio
ii. Quick/acid test ratio
iii. Gross profit margin
iv. Profit margin ratio
v. Return on capital employed
vi. Return on owners' equity
vii. Average collection period
viii. Debt ratio
ix. Dividend cover
x. Earnings per share
(20 marks)
Milton Group
McKenzie
Hotels
i.
Current ratio (times)
1.78
1.49
ii.
Quick ratio (times)
1.42
1.30
iii.
Gross profit margin

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61.60%
35.45%
iv.
Profit margin
27.20%
11.82%
v.
Return on capital employed
58.62%
31.71%
vi.
Return on owners' equity
47.5%
29.6%
vii.
Average collection period (days)
146
76
viii.
Debt ratio
40.3%
53.3%
ix.
Dividend cover

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June 2004 Examiner's Solution C a s e S ol u t i o n 1 1. i. ii. iii. iv. v. vi. vii. viii. ix. x. Compute and contrast the following key ratios for both companies: Current ratio Quick/acid test ratio Gross profit margin Profit margin ratio Return on capital employed Return on owners' equity Average collection period Debt ratio Dividend cover Earnings per share (20 marks) i. ii. iii. Milton Group McKenzie Hotels 1.78 1.49 1.42 1.30 Current ratio (times) Quick ratio (times) Gross profit margin iv. v. vi. vii. viii. ix. 61.60% 35.45% 27.20% 11.82% 58.62% 31.71% 47.5% 29.6% 146 76 40.3% 53.3% Profit margin Return on capital employed Return on owners' equity Average collection period (days) Debt ratio Dividend cover x. 2. 13.3 4 33.1 pence 26.25 pence Earnings per share Prepare some brief notes for the Chief Executive outlining your view of the financial status of McKenzie Hotels plc in comparison with Milton Group. Detail both companies' major operating strengths and weaknesses as identified from the ratio analysis. (10 marks) Brief notes on Mckenzie Hotels financial status vs Hilton 1. McKenzie has significantly lower Operating Expenses than Milton Group. This is significant in view of the fact that there is only £0.5m gap in their respective sales revenues. This seems to indicate that McKenzie is managed in a more efficient manner than Milton. 2. McKenzie manages also to operate with significantly lower inventory levels (£650k) ...
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