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
Taxation                                     (5,460)
––––––
20,540
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
Non-current liabilities
Loan                                                                 150,000
5% Preference shares                                    40,000
Current liabilities
Payable                                                             50,000
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.