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The table below shows some kery performance indicators for two companies in the same industry for the year ended 30/Jun/2022: Ratio & Pom plc & Dom plc Return on shareholder funds (ROSF) & 18 % & 20 % Earnings per share (EPS) & 41 mathrm(p) & 43 mathrm(p) Price to earnings (P/E) & 8 times & 16 times Required: (a) Using the ratios provided in the table, analyse the performance of both companies from the viewpoint of a potential investor looking to buy a majority of shares. Ensure to cover all ratios in your analysis. ( 6 marks) (b) Recommend to the potential investor which of the two companies would be a better investment. Briefly justify your recommendation. (2 marks) (c) Identify and briefly explain three ways in which mhagers could improve the Economic Value Added (EVA) of a business (4 marks)

Question

The table below shows some kery performance indicators for two companies in the same industry for the year ended 30/Jun/2022:

 Ratio & Pom plc & Dom plc 
 Return on shareholder funds (ROSF) & 18 % & 20 % 
 Earnings per share (EPS) & 41 mathrm(p) & 43 mathrm(p) 
 Price to earnings (P/E) & 8 times & 16 times 


Required:
(a) Using the ratios provided in the table, analyse the performance of both companies from the viewpoint of a potential investor looking to buy a majority of shares. Ensure to cover all ratios in your analysis. ( 6 marks)
(b) Recommend to the potential investor which of the two companies would be a better investment. Briefly justify your recommendation. (2 marks)
(c) Identify and briefly explain three ways in which mhagers could improve the Economic Value Added (EVA) of a business (4 marks)

The table below shows some kery performance indicators for two companies in the same industry for the year ended 30/Jun/2022: Ratio & Pom plc & Dom plc Return on shareholder funds (ROSF) & 18 % & 20 % Earnings per share (EPS) & 41 mathrm(p) & 43 mathrm(p) Price to earnings (P/E) & 8 times & 16 times Required: (a) Using the ratios provided in the table, analyse the performance of both companies from the viewpoint of a potential investor looking to buy a majority of shares. Ensure to cover all ratios in your analysis. ( 6 marks) (b) Recommend to the potential investor which of the two companies would be a better investment. Briefly justify your recommendation. (2 marks) (c) Identify and briefly explain three ways in which mhagers could improve the Economic Value Added (EVA) of a business (4 marks)

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CliveElite · Tutor for 8 years

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(a) Dom Plc tends to be more profitable with a higher return from both EPS and ROSF day-to-day and may Jeff returns speedily. However, Pom plc has a lower P/E ratio indicating potential for investors to receive higher returns leveraging longer-term investment.<br /><br />(b) The recommendation to invest would be Dom Plc for investors pleasant taking risks for higher potential immediate returns. However, if the investor has long term and risk aversion perspectives, the suitable recommendation would be Pom Plc.<br /><br />(c) Managers can improve EVA using the following approaches:<br /> - Minimizing operational expenses to magnify Net Operating Profits After Tax (NOPAT)<br /> - Improve effective working capital management<br /> - Centre investments in projects that may offer returns far compromising of costs of capital

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## Step1: <br />The Return on Shareholder Funds (ROSF) shows the profitability of the shareholders' investment.<br />Comparing both companies ROSF ratios, Dom Plc has the higher ratio (20%), rendering a better return on shareholder funds compared to Pom Plc's (18%).<br /><br />## Step2: <br />Earnings Per Share (EPS) refer to the amount of company profit attributed to each outstanding share of common stock.<br />In this case, Dom Plc has a higher EPS (43p) than Pom Plc (41p), suggesting Dom Plc has generated more profits per share.<br /><br />## Step3: <br />The Price to Earnings (P/E) ratio is a measure that shows how much investors are willing to pay per dollar of earnings.<br />The lower the P/E ratio (like Pom Plc's 8 times), the more earnings you can get per investment dollar. Whereas Dom Plc lesser with a higher P/E ratio (16 times).<br /><br />## Step4:<br />Recommendation largely depends on risk-taking personality - an investor might choose Dom Plc if they opt for higher current returns (with higher EPS and ROSF). With a longer-term, risk-averse investment, Pom Plc could be an options proven it lesser P/E ratio.<br /><br />## Step5:<br />Improving Economic Value Added (EVA) translates into focusing on activities that produce higher returns than the cost of capital. Strategies could include reducing operational expenses to improve Net Operating Profits After Tax (NOPAT), managing working capital more efficiently and investing in projects that generate returns higher than the cost of capital.
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