1. XEN CO
The following information is available for Xen Co, a manufacturing company. You are provided with an extract from the Statement of Profit or Loss:
Operating profit 42,000
Interest charges (16,000)
Profit before tax 26,000
Xen Co has an operating profit margin of 15%. You are provided with an extract from its Statement of Financial Position:
Equity and reserves
Total equity and reserves 420,000
5% Preference shares 40,000
I. Which TWO of the following statements are correct?
(1) A reduction in the tax rate will improve the interest cover ratio.
(2) If the level of long-term debt in Xen Co is reduced, the interest cover and dividend cover ratios will improve.
(3) If the level of long-term debt in Xen Co is reduced, the asset turnover ratio will improve.
(4) Financial gearing is a measure of risk, but interest cover is a measure of profitability.