Question
Question 6 All of the following are investment ratios designed to help shareholders assess the returns on their investment except: Dividend yield ratio Earnings per share ratio Price to earnings ratio C Interest cover ratio 3p
Answer
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Grayson
Professional · Tutor for 6 years
Answer
Interest Cover Ratio
Explanation
## Step 1:We need to identify the ratio, among the four in the options, that isn't specially designed to assist shareholders in assessing the returns on their investment. ## Step 2:To accomplish this task, we must first understand what each ratio implies:* The Dividend yield ratio represents how much a company returns to its shareholders in the form of dividends, provided as the annual dividends per share divided by market price per share. * Earnings per share ratio is a measure of a company's profitability, calculated as the total annual profit divided by the number of outstanding shares * Price to earnings ratio is commonly used for valuing a company and determining if it is over- or underpriced and is calculated as market value per share divided by earnings per share.* Interest cover ratio, however, which is equal to earnings before interest and taxes (EBIT) divided by interest expenses, is designed to gauge the company's ability to pay its interest expenses, nothing to do directly with shareholders' profits - this key component distinguishes it from the other options.## Step 3:Not all of these options provide metrics for estimating returns on investment as specified in the question - our focus here is the Interest Cover Ratio.