Refer to Appendix 1. Calculate as at 20 April 2018:

Mark scheme

Marking points from the official mark scheme (May/June 2018). The mark or mark type is shown in brackets.

1. [1] (a)(i) Dividend yield = dividend per share × 100 / current share price
2. [1] (a)(i) Dividend per share = $1.1m/10m = $0.11
3. [3] (a)(i) = 0.11 × 100 / 5 = 2.2%
4. [3] (a)(i) Allow 0.022 (3 marks)
5. [3] (a)(i) DY = 2 (3 marks if evidence of calculation)
6. [2] (a)(i) 0.22 (2 marks)
7. [2] (a)(i) 1.43% (2 marks) Wrong year used
8. [1] (a)(ii) PE Ratio = current share price / Earnings per share
9. [1] (a)(ii) Earnings per share = Profit after tax / Total number of shares
10. [1] (a)(ii) EPS = 6m/10m = 0.6
11. [5] (a)(ii) PER = 5/0.6 = 8.3 (5 marks if evidence of calculation)
12. [5] (a)(ii) PER = 8
13. [4] (a)(ii) PER = 10 (4 marks) Wrong year used
14. [2] (b) Knowledge: Shareholders may be primarily interested in the return from their investment (rising share price for capital gain, rising dividends for income); Dividend yield shows the rate of return based on the current market share price; PE Ratio gives an indication of market confidence in the business
15. [2] (b) Application: OFR from (a) applies i.e. candidate using own figure should be rewarded; Dividend yield has risen from 1.43% to 2.2%; Dividend yield has increased due to lower share price; Dividend yield is substantially below the industry average – better returns elsewhere; Business has low gearing – less risk for investors; PE Ratio has fallen from 10 to 8.3; Profits have decreased
16. [4] (b) Analysis: DA has ambitious expansion plans. If successful, this could lead to an increase in the share price; Dividend cover is 5.45; Linking shareholder decision to Lino's statement that DA needs to retain profit for investment; Will share price continue to fall? The decreasing PE Ratio suggests declining market confidence in DA's ability to generate long term profits and thus makes it a less attractive investment for shareholders; DA can easily cover the dividends payable suggesting that there is limited risk in making the investment; Business growth may produce less benefit to shareholders due to low gearing
17. [4] (b) Evaluation: Short term v long term judgement of shareholders; Willingness of shareholders to wait for better returns?; More data need to identify longer term trends in ratios