You are presented with the following information for three quite separate and independent companies: Additional information: 1

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You are presented with the following information for three quite separate and independent companies:

Additional information:
1 The operating profit before interest and tax for the year to 31 March 2018 earned by each of the three companies was £300,000.
2 The effective rate of corporation tax for all three companies for the year to 31 March 2018 is 30%.
This rate is to be used in calculating each company’s tax payable on ordinary profit.
3 An ordinary dividend of 20p for the year to 31 March 2018 was paid by all three companies, as were the preference dividends.
4 The market prices per ordinary share at 31 March 2018 were as follows:

5 There were no changes in the share capital structure or in long-term loans of any of the companies during the year to 31 March 2018.


Required:

(a) In so far as the information permits, prepare the statement of profit or loss for each of the three companies (in columnar format) for the year ending 31 March 2018 (formal notes to the accounts are not required).
(b) Show the change in retained profits for each company over the year.
(c) Calculate the following accounting ratios for each company:
(i) Earnings per share;
(ii) Price earnings; and
(iii) Gearing [taken as total borrowings (preference share capital and long-term loans) to ordinary shareholders’ funds.
(d) Using the gearing ratios calculated in answering part (c) of the question, briefly examine the importance of gearing if you were thinking of investing in some ordinary shares in one of the three companies assuming that the profits of the three companies were fluctuating.

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