Question: A business friend of yours who does not know much about accountancy has a holding of 1,000 ordinary shares in a pubhc company and asks you to explain certain points in connection with the company's last balance sheet, a copy of which he has just received. The following is a summarised copy of the balance sheet in question.
The questions your friend wants answered are the following:
1. On the assumption that the ordinary shares of a well-managed company of this size, engaged in the industry in question, should have a market quotation such that the ratio of the balance of the company's annual earnings, after paying the preference dividend, to the total market value of the ordinary shares should be 12 ½ per cent, what ought the company's profit (before tax) to be in order to justify a quotation of 18/-?
2. Assuming that the company's profit for the last year did in fact amount to the figure you calculate, what is the ratio of net profit to total capital employed in earning that profit as disclosed by the balance sheet?