Interpretation of Accounts The following figures have been taken from the final accounts of Sawgrass Plc, a manufacturer in the dairy industry, for the year ended 31/12/2005 - Leaving Cert Accounting - Question 5 - 2006

Earnings per share (EPS) is determined as follows:

$\text{Earnings per Share} = \frac{\text{Net Profit after Pref Div}}{\text{Number of Ordinary Shares}}$

Net profit after preference dividends is calculated:

Net Profit = €55,000, Proposed dividends for preference shares are not considered here as we focus on ordinary shares. Therefore:

$\text{EPS} = \frac{52,000}{300,000} = 0.1733 \text{ (or €0.1733)}$.

To calculate cash sales, we use the formula:

$\text{Cash Sales} = \text{Total Sales} - \text{Credit Sales}$

From the accounts, we calculate credit sales using the debtors' figure:

Total Debtors = €48,000; The period of credit given to debtors is 2 months, therefore:

Credit Sales = Debtors * (12 months / 2 months) = €48,000 * 6 = €288,000.

Now:

Cash Sales = €890,000 - €288,000 = €602,000.

The period to recoup the market price of an ordinary share is calculated as follows:

$\text{Period to Recoup Price} = \frac{\text{Market Price}}{\text{Dividend per share}}$

Using the information provided: Market Price = €200, and Dividend per share for the year 2004 is €15, thus:

$\text{Period} = \frac{200}{15} = 13.33 \text{ years}$.

The dividend yield for 2004 is calculated by the formula:

$\text{Dividend Yield} = \frac{\text{Dividend per Share} \times 100}{\text{Market Price}}$

Where Dividend per share = €18 and Market Price = €210:

$\text{Dividend Yield} = \frac{18 \times 100}{210} = 8.57\%$.

Debenture holders might be dissatisfied due to several concerns:

1. Dividend Policy: Based on the current year’s earnings, the proposed dividends of €48,000 may be considered excessive as the dividend cover is only 1.5 times, indicating a potential risk to the repayment of debentures.

2. Security: The fixed assets of €320,000 serving as collateral for the debentures must be assessed accurately, and concerns regarding market value and their potential realization may effect lender confidence.

3. Profitability: The return on capital employed has decreased. A lower return indicates that there may be insufficient funds generated to meet interest payments.

4. Liquidity: The company's liquidity problems are evident. The quick ratio has dropped from 1.2 to 0.7, indicating that funds might not be readily available to cover short-term obligations.

5. Gearing: The gearing ratio has worsened, which means reliance on debt financing has increased, furthering the risk associated with debenture finance.

6. Market Value: A decline in market value from €2.10 to €2 indicates a drop in confidence and further discourages investment.

To improve cash flow and accelerate liquidity, the company can take the following actions:

1. Paying Out Lower Dividends: Reduce the proposed dividend to conserve cash for operational needs.

2. Selling Investments Rather than Issuing Debentures: Liquidating non-essential investments may enhance liquidity without adding to debt.

3. Issuing More Shares: Consider issuing ordinary shares to raise capital.

4. Increasing Gross Profit Percentage: Strategically reduce costs or increase prices to boost the gross profit margin.

5. Diversifying Into Other Areas: Explore new product lines or markets to enhance revenue streams.

6. Improving Receivables Collection: Streamline the receivable collection process to reduce the debtor period and expedite cash inflows.

7. Sale and Lease Back: Consider selling assets and leasing them back, which can provide immediate liquidity.